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Here are my Main Takeaways from the June ECB Announcement and Mario Draghi’s Press Conference -- will update if needed.
Top Takeaways from ECB
- ECB Hikes 2016 GDP and Inflation Forecasts
- More Stimulus on the way -- Corporate Bond Purchases Begin June 8, TLTRO Begins June 22
- ECB Expects Extra Impetus from Stimulus Yet to Hit
- Low Oil Prices are Helping but Q2 Growth May be Slower than Q1
- Not Seeing Significant Wage Pressures of Second Round Inflation Effects
- ECB Still in Wait and See Mode – Needs to See Full Impact of Stimulus, Maintains Dovish Bias
- BUT If Financial Conditions Tighten Significantly, they Stand Ready to Act
- Global Economy and Brexit Main Risks for EZ
This Wednesday started out like any other Wednesday in the currency market. There was some mild reaction to Australian data in Asian session trade. During early Europe cable caught a bid after a decent PMI number and positive developments on Brexit negotiations and loonie followed crude like a drunken sailor dipping and rising with each movement in oil.
In short it was just a regular day in FX with prices zigging and zagging which is what allows market makers to make a living by selling short term highs and buying short term lows. But then at around 9 am NY time all hell broke loose. NY Fed governor Bill Dudley said a few words about the troubling economic slowdown. Equities plunged. USD/JPY collapsed and euro went on a one way tear putting more points on the board in two hours than it did in the past 20 days.
If you think of day trading and market making as akin to selling insurance ( you take small limited gains in return for rare, but large losses) then days like Wednesday are essentially hurricane days. Insurance companies are some of the most profitable businesses on earth, but during hurricane days no one makes a dollar. Indeed any seasoned insurance man will tell you that the key to surviving such events is to minimize the damage to your balance sheet.
Having lived through enough of these one way days over the years to gather some perspective, here is what I learned from the school of hard knocks. First and foremost, recognize that you are middle of a s-tstorm. This is a lot harder than it sounds, as both hurricanes and market meltdowns provide few clear clues that trouble is coming.
But here is one.
You get stopped out.
Not only that but you get stopped during the sleepy Asian session on some very funky price action. Start paying attention. Now you may howl in laughter at the absurdity of this idea because getting stopped out is just part and parcel of day trading. True, but if your system is 90-95% accurate you don’t get stopped a lot, so take the first one seriously and if you quickly get stopped again then get very, very cautious.
The first rule of good business is that you don’t sell house insurance on hurricane day. All your great algos, wonderful inventory management systems and optimized trading strategies go tossed out the window. If you are dumb enough to entrust the computer with your trading on hurricane day it will gladly bankrupt your account as it continues to sell more and more “attractive policies” on houses that are about to be ripped apart.
So take control of your algo and do two things right away. Widen your entries by 100% and lower your size by 50%. Yes you will be making less trades with less capital -- and trust me that will be the best decision you will make that day. Next, take profits. Take profits any time you can. Don’t worry about your set parameters. Don’t worry about milking every pip. Open the trade and get the f- out as quickly as you can. A one pip profit is better than a 100 pip loss. On hurricane days you don’t challenge the winds of fortune. You just gladly take the crumbs that they give you.
This is perhaps the most difficult lesson for traders to learn. Our stubbornness tends to rise in inverse proportion to market volatility. There is nothing more expensive in the world than the cost of human ego. We want to be right. We want to win. We want to beat back the furies and like the great Greek heroes of yore come out as conquerors of our fate. Hollywood and Wall Street constantly prey on this myth and we fall for it every time.
The truth of the matter is that if you base your business on a nice and steady diet of day trading pips, then “making a stand” is just about the dumbest thing you can do. As general Patton once said, “No son of bitch ever won a war by dying for his country. He did it my making the other son of a bitch die for his.” Save the heroism for the movies. In real life on hurricane days you trade like a coward and live to fight another day.
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NY Open 4 Minute Update
Aussie Hits Fresh Lows
For the first time in 7 years, USD/JPY hit 120. This morning’s strong U.S. jobless claims report reinforced the recovery in the U.S. economy while ECB President Draghi’s dovish monetary policy bias increased the attractiveness of U.S. assets and in turn the U.S. dollar. The ECB did not announce new measures, but they fully intend to do so in the early part of next year. Unfortunately USD/JPY failed to hold its 120 break and a large reason for that are U.S. rates, which refuse to rise, encouraging profit taking at this key level. At this stage, it will all be up to Friday’s non-farm payrolls report. If payrolls exceed 230k and the jobless rate holds steady or improves, USD/JPY will rise back above 120. However if payrolls prints 215k or less and the unemployment rate holds steady or rises, it will back to 119 for the pair.
Taking a look at the monthly chart of USD/JPY, 120 is an important resistance level not only because of its psychological significance but also because it represents the 61.8% Fibonacci retracement of the 1999 to 2011 decline. If this level is broken, the next area to watch will be 122.20, where the currency pair found resistance in January and February of 2007. Should this turn out to be a failed test for USD/JPY in the near term, the pullback could extend as far as its recent swing low of 117.25