FX Island

By the end of the week the markets finally saw some calm as news about the sub-prime fiasco began to recede from the front pages.  On Friday, the announcement that Bank of China carried nearly 10 Billion dollars of exposure to asset-backed bonds on its books had little impact on trade, partly because the Chinese bank is well capitalized and partly because the marked is becoming somewhat inured to stories of MBS risk. Traders attention is now shifting to handicapping what effect the past two weeks of volatility in capital  markets may produce on the real economy.

To that end the US economic news was actually surprisingly good, though backward looking. Durable goods expanded by the biggest percentage amount since 2004 largely on the back of aircraft orders, while New Homes sales increased for the first time since April despite the much publicized problems in the housing sector. The New Homes Sales number was a bit deceptive as only the West saw a steep pick up in sales. Nevertheless,  the latest economic data suggests that US economy continues to function and perform well even in the face of mounting problems in residential real estate.

Ironically enough, positive news for the US economy and US stock markets spelled doom for the  greenback as risk appetite returned to the currency market and the buck followed  its familiar path of strength against the yen and weakness against all other majors. Next week event risk remains relatively tame with only GDP revisions and Personal Income and Personal Spending number of note. Given that this is the last week of August with Labor Day coming up perhaps the markets will get a much needed rest from volatility.

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Source: Daily Fx

Before you open a real live account it is important that you familiarize yourself with the most common mental mistakes new traders make. You’ll probably still make them anyway, but at least you’ll actually be aware you’re making them which hopefully will make easier for you to correct them.

Overconfidence

Trading for a living can be a dream come true, but it can also be a nightmare. If believe trading is easy, you’re done before you even started. Trading is not easy. Trading is hard. Real hard. It’s hard to consistently remain mentally focused and stay disciplined. Know that going in and you increase your chances of success big time.

Lack of Emotional Control

Your mind always assumes the worse. It does that to protect you from harm. Because there is a potential that you’ll lose money and all the mental anguish that brings, the mind tells you not to do a trade.

You have to learn how to override this self-protecting mechanism if you want to be a trader. Talk to your mind. Tell it you are fine with doing the trade. Remind it that have a stop placed and you will not be harmed if it doesn’t work out. Convince your mind that in order to make money trading you need to take risks and the risks that you are taking have been carefully planned and measured.

Fooling yourself

Once you are in a trade do not try and justify its merit. The market does that for you. The final outcome of your trade should be a stop loss triggered, breakeven, or profit taken Once the trade is completed, don’t dwell on it. Every trade is different and what worked this time may fail next time. Review it briefly and go on to next trade. Focus on the overall trading and don’t spend too much time on each individual trade. This will make you an excellent trader. Accept the outcome of your trades. But don’t accept not sticking to your game plan.

Jumping the gun

Traders are constantly jumping into the right position at the wrong time because they’re afraid they are going to miss it, especially at market turning points. Don’t be afraid to miss the first 25% of the move; and get out after 75%. Catching 50% of a confirmed move will produce awesome results. You will also not have to deal with getting stopped out and then watch the price reverse and go in your direction.

Not Thinking in Probabilities

Accept your trade losses as being normal. Don’t beat yourself up over them or try to unnecessarily tinker with preset stop loss and take profit. Don’t expect to be right 100% of the time.

Source: Babypips.com

Today’s recovery in the US stock market, carry trades and bond yields brought optimism back into the financial markets.  News that BNP Paribas will be reopening its three frozen funds and reports that four of the nation’s largest banks tapped the Fed’s discount window as a vote of confidence has been taken very positively by traders and investors.  Even though the rebound today was strong, which means that we could see a bit more extension tomorrow, traders need to be cautious because this is nothing more than a reflex rally. 

There was as much bad news as good.  All of the weekly reports including the ABC consumer confidence and mortgage applications fell sharply.  Confidence saw the steepest drop in 20 years.  Lehman Brothers became the first Wall Street bank to close down its subprime lending unit and will be laying off 1200 workers.  In fact, layoffs are being announced on a daily basis.  The estimated toll of subprime related job losses is approximately 37,000.  Even for the companies that are not cutting back on their workforce, they are not likely to be hiring either. 

The word on the street is that many companies have instituted hiring freezes.  With the costs of borrowing increasing and demand for corporate issued commercial paper falling, keeping profit margins steady is the top priority for most companies.  On a consumer level, a weaker labor market could put a big strain on household finances.  On top of the rising cost of mortgages, credit card lenders are also increasing their terms of credit.  This includes higher interest rates, lower lines of credit and more stringent review of finances.  This would of course spell weaker consumer spending and eventually weaker us growth.

Read full story here.

Source: Daily Fx

The aussie saw little changed in trading against the majors on Tuesday in New York. The Australian dollar was up on its U.S. counterpart , but gave back most of its gains from earlier in the morning. The aussie was basically flat with the euro and sterling.

The Australian dollar was up against the greenback on Tuesday in New York, but surrendered most of its early gains. The aussie edged higher in the early morning and touched as high as 0.7956 at 5:30 a.m. ET. It slipped over the next two hours, but then rebounded in the later morning. Trading was level through the afternoon and the currencies moved at 0.8010 at 5:40 p.m. ET.

The aussie was little moved against the euro on Tuesday in New York. The Australian dollar saw weakness in the early morning, hitting a daily low of 1.6912 at 5:30 a.m. ET. It edged back higher in the late morning and into the early afternoon. The currencies moved at 1.6798 at 5:45 p.m. ET.

The Australian dollar was little changed versus the sterling on Tuesday in New York. The aussie dipped as low as 2.4612 at 2:45 a.m. ET and dropped to a support level at around 2.4804 in the later morning. The pair traded at 2.4735 at 5:50 p.m. ET.

Source: Forex-Markets.com

On Friday just before the opening US stock market trading the Fed announced a 50 basis point cut in the discount rate. The discount rate is the rate Fed charges to other banks and is nearly always higher than the far better known Fed funds rate which is the rate banks charge each other for overnight loans.

$    Dollar Rally Done As Fed Yields To Pressure?
€    Euro – At The Whim Of EURJPY
¥    Japanese Yen Remains Reliant On Risk Aversion
₤    British Pound Hammered By Risk Flows, Data And Rate Outlook
₣    Will The Carry Trade Unwind Work Against Swissie?
C$   Canadian Dollar Loses Traction on Carry Shakeout
AU$   Australian Dollar Plummets, RBA Puts Reserves Into Action
NZ$   Carry Trade Decimates the Kiwi, Can it Come Back?

Read full story here.

Source: Daily FX

The Nikkei took its cue from the strong Friday finish of the DJIA rising more than 450 points as a sense of stability returned to the financial markets. After initially  trading down at the Asia open USDJPY rebounded for the rest of the night rising as high as 115.50 when bargain hunters poured back into the carry trade on the assumption that the worst of market turbulence was over.

That however may be a big assumption to make. Volatility is likely to remain  high in the currency market this week  as traders try to grapple with the implications of last week’s events. The battle now is between those market participants who believe that that the current crisis is simply a problem of illiquidity versus those who think that the markets may be facing the much greater danger of insolvency. If the bulls are correct then Fed actions on Friday may have been enough to calm the markets and the aftereffect of last week’s turmoil should not have much of a negative effect on the real economy.  However, if the bears are correct and the current credit crunch leads to widespread bankruptcies and an economic slowdown the fallout from last week will have lasting consequences… 

 Source: Daily Fx