the gestalt shift » fundamental analysis

Forex Fundamental Analysis Forecast: EUR/USD 04/13/2010

admin — Tue, 13 Apr 2010 13:05:43 +0000

The “Outside the Box” Trading Analysis Video is designed to assist you in selecting the right direction in your trading, a critical skill for successful forex trading.

The Euro hit lows at below 1.33 last week but made a turnaround on “positive” developments on the Greece story. Is this rally here to stay? Let’s see what the forex options market and credit markets have to say…

The case for emerging market currencies

pauls — Sun, 06 Dec 2009 02:36:39 +0000

Warning: parts of this article (in particular the currency options section) may be for more advanced readers/traders

While most of us have focused for good reasons (liquidity, transparency) on the major currency pairs such as EUR/USD or USD/JPY, there’s a great opportunity waiting out there for those willing to take a chance with less well-known currencies such as the Brazilian Real (BRL) or the South Korean Won (KRW). As always we need to examine the forces moving such currencies. As you will see, there are many positive aspects of emerging markets (EM) and their respective currencies.

First, let us consider the case against developed countries (reasons to be short these currencies).

The debt of the developed countries is huge, and will hang over their economies for a very long time. The aggregate G7 debt is 10% of GDP.
They will emerge more slowly from recession, and will tend to keep a tighter lid on interest rates, keeping monetary policy loose. In 2010, the forecast GDP growth in the US is 2.7%, in Japan, in the UK and EZ it’s 1.5%, and in Australia it’s 3.3%. By contrast, the forecast GDP growth in China is 9.8%, India and Korea 7.8%, Brazil 5%, and Singapore 6.5%
Strong capital outflows- investors seeking return. The growing popularity of ETFs focused on Emerging Markets is a good example of this.
Commodity consumption, leading to larger current account deficits
Demographics – ageing, shrinking populations (especially Japan, but EZ and the US, too)

EM countries, on the other hand,

Offer the best carry trade opportunities. For example, today the Brazilian Real is at 8.75%, the South African Rand is at 7%, and the Turkish Lira is at 6.75%
Their economies are poised for much stronger growth. Emerging Asia is forecast to grow nearly 8% in 2010. Some think that in the next 5-10 years, 2 of the 4 largest economies will be EMs.
Strong capital inflows (aka Foreign Direct Investment or FDI) seeking return
Commodity production and export, leading to current account surpluses
Demographics- younger, growing populations with greater fractions of contributing people.

Currencies benefit from high growth (because rising GDP & CPI drives central bank interest rates higher, attracting carry traders) and capital inflows (because local investment requires local currencies- forcing the local currency to be bought, which drives it up).

These are fundamental forces, and while in the long run will prevail, you must keep in mind that in the short term, sentiments sometimes counter these forces.

So obviously, the idea is to be long strong EM vs weak developed country. For example, long BRL/GBP, or long KRW/$.

What are the risks? There’s always the chance that the nascent recover will falter, be a double dip, or some other structure that puts these long term trends on hold (they are inescapable in the long run). Emerging Markets sometimes experience currency crises (lack of foreign reserves, high current account deficits), resulting in monetary controls, intervention and other tools which can temporarily hurt a currency.

So we need to ask how best to trade the EM currencies while managing risk? I have three example methodologies.

1) First, simply long the spot, with low leverage. This is what most folks do, and will benefit from the long term appreciation we expect, along with excellent carry. Pending dramatic movements are almost always signaled by market watchers like the IMF or World Bank. A devaluation should never take you by surprise. Here’s an example of the ZAR (South African Rand) appreciating over a long period of time due to fundamentals (Gold, other commodity appreciation)

2) Second- long the spot with some insurance. To protect against a devaluation or depreciation, put on what is called a collar. This is an option structure often used by import/export companies to protect against currency risk in a forward. The most basic structure is long an out-of- the- money put (protect the downside), paid for by a short out-of-the-money call. While this limits the upside, you are protected the downside, and collect the carry. Here’s a P&L example. Protected by the put, you can leverage up the spot to get high net carry, knowing your downside is limited.

3) My personal favorite, simple long-dated (1 yr+) option spreads. This is the favored methodology of such incredible money managers as Jim Leitner, Christian Siva-Jothy and others. It provides excellent risk management, strong upsides, and limited loss. Here’s an example P&L of a bullish spread (long call @ 90, short call @ 95, short put @ 80) I just did last week on the $/JPY. It created a maximum 4:1 payoff.

So in conclusion, I believe than the EMs are going to offer the best returns over the longer term, based on inescapable trends. While the risk is there, methods and tools exist to mitigate those risks.

Paul Stafford writes a weekly Currency Briefing, reviewing the fundamentals moving the major currencies. To download a sample briefing, or to subscribe, please visit www.4xtradertools.com

Video: More FAQs on trading forex with behavioral and fundamental analysis answered

admin — Mon, 14 Sep 2009 06:49:17 +0000

This video follows the last one where I begin to answer questions about trading forex with behavioral and fundamental analysis!

Interview with Tom Yeomans

admin — Mon, 27 Jul 2009 02:20:47 +0000

Tom Yeomans is a trader based in Canada who has made a big impact to the forex community by teaching methods to profit from the market based on what really moves markets- fundamentals. Tom demonstrated his expertise in markets and ability to teach others by putting his reputation on the line everyday in live trading rooms of over five hundred people. He now runs a website, tradetime.ca, featuring both educational materials for trading forex as well as institutional-caliber currency analysis software. After chatting with him last month I jotted down a few notes and posted an excerpt below. I hope you enjoy it.

What was your strategy and at what point did you realize you were profitable due to having an edge as opposed to luck? Alternate: How did you develop your edge over time to profit from the markets?

[When I first started out] I lost about $6,000 and replenished my account a few times and then started paying attention: I used to get wiped out around 08:30 NY time, and I thought, “what is this?” At that time, no one was looking at economic reports and news trading, and stuff. This was in 2004/2005 and for some reason, forex being a newly established market, no one else paid attention and that became my niche. I spent the next three years going intensely into all the economic reports that were being released. What would happen? What were the trigger points for when they would take off? I would sit there and I would stun audiences of up to 500 traders in the morning. We would get numbers directly from the data stream. Jobs numbers- terrible – BOOM! And the US Dollar would sink. It worked until it got phased out by the brokers. It was wonderful because a lot of people were [earning] a lot of money but I left about a year or two before everyone else left [when the edge started to disappear]. [After that] I started looking at the S&P and the Dow and listened to the audio pit noise from the CME, and we’d make trades with the pit noise. We made a lot of money doing that. Finally that started to fade away [also] with this economic situation coming in last year so I got away from that, so I’ve been strength trading on currencies.

Most people hold the view that “the trend is your friend,” and they see EUR/USD going up so they just buy using their technical indicators. What’s wrong with this? (Hinting at the necessity to view individual currency strength)

Technical analysis seems to be a beginner’s answer to having to actually sit down and learn what it is they’re doing. It’s a lot easier to just get some bogus technical indicator like MACD or RSI or blah, blah, blah. All these technical tools were transferred from the stock industry where they didn’t work anymore either. Technical analysis has its place, but it’s not the end all and be all, and it can’t replace knowledge. A lot of times in the morning I can make trades just based purely on what I see and what I’m hearing on the news. I don’t use candles or anything other than moving averages which gives me an idea of what’s going on and where [price] has been. That’s me personally. There are other very successful traders that use technical analysis.

Right and one of the things I’ve noticed about technical analysis is that it can actually appear plausible and easy to trade because it looks great in hindsight but it’s difficult to tell which patterns and indicators give signals that are based on randomness and which actually have some meaning (i.e. patterns representing market psychology). It brings me back to a quote I read in the Zurich Axioms, [edited: "Chaos is not dangerous until it begins to look orderly."]

(laughs). Well, all trading is the same in that it’s a gambler’s industry and most people lose. Most people use technical analysis, and there you are. I think what you need is experience and unfortunately there’s no way to get to it except through experience. Most traders fail within ninety days. If you can get through for a year or so and keep yourself going you can eventually get some experience. And after a while you just know.

Let’s talk about currency correlations. How can this be used to the investor’s advantage?

I’m actually writing a book about correlations, but it probably won’t be out until next year. I watch the Dow and the S&P to get a signal [noting] when the US Dollar is weak or strong. I often [even] see moves in the currency market that are later reflected in those. I often will see movements in the currency markets that are later reflected in other currencies. I’ll watch gold, silver, oil, the Dow Jones, and the S&P 500 to see what’s going on. I recommend just watching these on an intraday scale. Sit there for a few days or even weeks on Metatraderar and you’ll see [the way] they start to move. I invented and have used a currency strength meter since four years ago. I’m surprised not all traders are using it. It doesn’t make sense to me how someone can be in the foreign exchange business and not know whether the Dollar or the Swiss is strong. You don’t just look at one chart. That will only tell you what [single] currency it’s strong or weak against. You have to look at a whole range of charts to find out [its individual strength]. Say I want to find out whether the US Dollar is strong or weak. Well I have to open up 12 or 13 charts to take a look. And that’s why I invented the meter. If I were to make a trade on the strength of the US Dollar that morning I’d better be sure that it had been strengthening according to [all] the other currencies.

As the market becomes more efficient, where do you see edges coming from in the future?

Right at this moment the edge that is working [for me] is getting leverage down [because times are so volatile] and going for the longer term in the day. Once you get the 8:30 reports out of the way you look at the trend for the morning and say, the US Dollar (as a single unit) has been strong all the morning. Unless that report says something that says that shouldn’t be, it should continue on that day. But I’m like you and I believe the trend is not necessarily you’re friend. But here’s something you never hear about: Currencies trend. Pairs don’t trend. If you look at various economic reasons for why a currency is priced a certain way then you become a better trader.

If you would like to get in contact with Tom Yeomans or learn more about his educational materials or Currency Strength Meter, please visit his site at tradetime.ca or read his blog at tomyeomans.livejournal.com