Forex Trading Tips: Dollar Rebound or Euro Rally?

FX Market Outlook

As my good friend Andy Busch put it, the NFPs on Friday were like Chicago weather. After you’ve experienced 10 degrees (Fahrenheit) 25 degrees doesn’t seem so cold. At -524K the US jobless data was horrible but against expectations of an even uglier -700K number, Friday’s report looked like a win. After struggling for a few minutes to make up its mind, the EURUSD plunged like a stone closing the day down more than 300 points off its highs.

Dollar’s rally was in no way a vote of confidence on the US economy which continues to crater as unemployment increases and consumer demand falls off the cliff, but rather simply a referendum on who sucks less in the currency market at the present time. Although the US employment situation is grave, the news from the Eurozone was hardly any better as we wrote on Wednesday, “unemployment in EZ largest economy rose for the first time in 3 years by a greater than expected 18K jobs. Today’s data point is the first clear evidence of a trend change in German labor market conditions, suggesting that further job losses are on the way as 2009 unfolds. The news is likely to confirm market expectations of a 50bp cut from ECB next week and should the labor situation deteriorate further, it will no doubt lead to additional interest rate cuts as the year progresses. We have argued ad nausea that ECB monetary policy in 2009 will be driven by the conditions in the German labor market and we continue to believe that this will be the primary negative factor on the euro this year.”

However the question remains -- will ECB budge? Next Thursday Mr. Trichet and company hold their monthly interest rate meeting and market expectations are rather muted. At best most market participants expect only a 25bp cut from ECB, but chances are good that Mr. Truchet may hold his ground an simply leave rates unchanged. Although this will no doubt only aggravate the economic situation in the EZ and could result in the region’ unemployment rate climbing back up to double digits it may nevertheless serve a short term catalyst for a EURUSD rally. If euro’s rates are unchanged it will remain the only G-4 currency to yield better than 2%, but Mr. Trichet’s intransigence could cost him dearly in the long run.

Despite EZ massive interest rate advantage last weeks auction of German Bunds went off horribly in comparison to the auction of US Treasuries -- a clear indication that the msrket believes that the tight monetary policies of ECB are unsustainable. Therefore the pair appears to be trapped in the 1.3300-1.3800 range for the time being as traders are left to look for any signs of stabilization on either side of the Atlantic.

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—————--A Trade or a Gamble?—————

I love to trade a lot -- which is of course a euphemistic way of saying I love to gamble. Although I have been to Vegas more than a dozen times I never laid down so much as a dollar bet in any casino. I have absolutely no interest in backjack, craps, slot machines or any other games of chance and I look down with disdain at the excited masses crowding the cavernous Vegas gambling halls. But deep down, if I am honest with myself, I have to admit that whenever I trade a lot I am just as much of a sucker as every hopeless loser that gives up his hard earned money to Steve Wynn or Sheldon Adelson

If you are constantly trading just for the sake of trading, just for the rush of being “in the game”, just for the momentarily thrill of being right you are gambling. You are trading without an edge, without any solid information and are therefore completely vulnerable to the random vagaries of price.

Towards the end of last year I decided to do something about my toxic addiction and created two separate accounts -- one for trades that would only follow my trading plan -- the other for all my trading/gambling impulses. But before I share my experience with you allow me to define the difference between a trade and a gamble. The key distinction is information. The less information you posses the more likely the chances are that your trade is gamble.

A techincal trader who only looks at the five minute chart to gauge his support and resistance points is just gambling. On the other hand a trader who looks through the hourly, daily, weekly and monthly support points, carefully calculates Fib retracement positions and only acts when multiple time frames confirm his analysis has a much greater chance of success. Similarly a fundamental trader who mindlessly reacts to the latest economic release without understanding the prior market expectations, the current price flow and and countervailing information on the other currency in the pair is also just gambling.

Notice the unifying theme? Like everything else in life success in trading requires hard work and homework. There is no magic formula, no simple 5 minutes per day method to make you money. In trading, working hard is no guarantee of winning, but not working hard is an assurance of losing, because trading at its core is a game of information and you must always be up to date on what’ s gong on in the market or become the sucker at the table.

Now back to my experiment. I subdivided my trading into two accounts -- one where I traded only calendar risk on a reactive basis with very disciplined entries and exit rules and strict adherence to money management. The other account was just for my whims and impulses. An interesting thing occurred. My “trading plan” account which I traded far rarely and more carefully became much more profitable and incurred much lower drawdowns. Meanwhile the equity in my gambling account bounced up and down like a hopped up rubber ball. Suddenly the thrill of “being in the game” wasn’t so much fun. Like a reformed smoker who appreciates the smell of fresh air, I was no longer drawn to making impulsive trades. That’s not completely true. I still dabbled in my gambling account (who amongst us can completely give up our vices?) but my need to trade constantly has been reduced substantially. The less you gamble, the more you realize how stupid it is and that has been the most valuable lesson learned so far.

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