Like a lot of Forex traders, I started out with a technical approach to my trading.

Learnt a method or two, spent a few hundred dollars on ‘systems’ that never really worked for me.

Each time I at least learnt a new indicator but I kept abandoning the method and turning to a new one. Sound familiar?

I kept on wondering why I couldn’t get my trading off the ground.

I understood risk control and position size so I wasn’t losing money but it seemed a whole lot of work without much income or prospect of it.

What I didn’t understand was that every indicator I used without exception was lagging. It was not driving price. In the UK we have an old expression that fits this scenario. It is putting the cart before the horse. The truth is if you ever want to trade like a pro you need to understand the market forces, what effects them and who manipulates them with what effect. In other words you can have a cart load of indicators, trend lines, signals and fibonacci ratios but nothing will replace understanding market drivers.

So we shouldn’t be surprised that the majority of members of the forex 5% club, the ones who make it to professional full time consistent income are all fundamentally informed as well as expert technical analysts. It isn’t a choice, its a winning combination.

Why You Can’t Trade Without This

Master Manipulators:

Central Banks

We know that central banks are playing a bigger and bigger role ‘controlling’ their economies thus neutralising to a lesser or greater degree the effect of market forces. That makes our job of prediction much harder and requires better quality information. Lets take Draghi, the ECB chairman. The numbers again last week and this have reinforced fears of eurozone inflation. Opec has increased the likelihood as we shall see.

Thursday is the ECB meeting where Draghi will consider again the possibility of QE, thus bringing, he hopes, some hope of stimulating a shrinking economy into growth. The analysts this week have been speculating on the chances of Draghi convincing enough ECB members that this is the only way forward and for it he needs a majority vote. The feeling is from comments from his deputy that it is unlikely until next year. The Germans continue to oppose him.

In a deflationary environment only shorting the euro makes sense, especially if QE happens sooner rather than later. Thursday’s outcome is totally unpredictable so not smart to trade the euro, and if already in keep stops close or take some profit off the table.

Why You Can’t Trade Without This

US Federal Reserve

The US Federal Reserve, the central bank you cannot afford to ignore, are in the process of unravelling the biggest QE program of all time. No-one quite knows the effects but that is for the future. Right now the data points to US recovery at this point. We can only trade ‘at this point’ understanding and allowing for the effects of policy as it is. We know that the FOMC takes a lot of notice of the jobs market. Its non-farm friday this week so this is a day to avoid USD trades or pairs and next week to use the outcome as a basis for our trading decisions.

Opec

Their decision last week ’not to interfere’ by cutting production and allowing market forces to find the price of crude oil may well have been a manipulation probably to starve out the higher cost producers in the US. Another truth is that nine of their own members will be hurt by the lower price even before the US. But their intentions and motives are in some way irrelevant. Understanding the economic effects in the economies we trade…yes we do trade economies not currencies…is crucial in our decision making process.

Here are some low cost crude oil consequences

1. Countries with high ratio of the GDP in oil exports will suffer the most. This includes all the Opec countries and Russia as we have seen already.

2. Inflation will be even harder to maintain or stimulate. This is depressing news for those countries already in the grip of deflationary fears.

3. Japan..third in the world rankings for importers of oil. Lower prices will help the consumer and manufacturing but will seriously challenge inflation targets and may mean more easing in the near future as they, like Europe try to fend off inflation. Once again a mixed blessing but more likely to weaken the currency.

4. Canada, dependant on oil exports, prices will affect growth going forward. They have some big numbers this week and recently their economy has been doing better. Oil prices are not going to help them.

5. Australia, currency devaluing due to the oil and iron-ore rout.

6. The US. An interesting case, it will lose some of its shale producers but members of the Fed believe low oil prices will actually stimulate growth in the economy. Inflation will still be challenged but there are factors in this economy that can weigh against it. It may mean a slower rate hike but many believe it will not change the fundamental of slow progress in economic recovery and slow increase in value of the USD.

More data so far this week…

There were PMI’s this week, watching the 50 level, the Spanish managed a healthy 54.7, Italy missed with an economy now shrinking at 49. GBP exceeded expectation and services PMI is even better at 58.6. This is important at the servoce industry is a major part of the UK GDP. Construction missed the number but is up at 59.4. It is always important to consider the number as well as the expectation. The estimated non farm in the US released yesterday missed the number so a warning for the announcement on friday.

Australia saw an improvement in retail sales and trade balance but there is a lot of challenge ahead for them due to the commodity prices drop as we have already seen. The GDP was the most important number this week and it fell shy of the expectation at 0.3%

Ones to Watch

GBPJPY long, AUDUSD short (already in that one) USDCHF , long (based on Swissie weakness and their economic attachment to the EZ). Next week depending on Canadian and US data, USDCAD long.

Prediction is not easy and losses are part of our ‘business’ . Our task as traders is to increase our probabilities and that is precisely what the 5% club do, choosing to gather enough information and understanding so that before they open their box of technical tricks they have already substantially improved their chances of being right.

Back next week with more, wishing you happy, informed, successful trading.

Judith Waker

fotistradingacademy.com

 

Why You Can’t Trade Without This