Hi Thomas,

what is the longest youve ever held a currency position? which currency was held?


THR,

Kenny Zilla

Hi Kenny,

Since I am more of a short-term swing trader, typically I will hold a trade from one day up to a week or more. However, since I only trade with the trend, I have been in a couple of trades in strong trending moves for about one month. Two trades in the last year that resulted in this long holding period where a short position in the USD/CAD in September and October of 2007 and more recently I held a long EUR/USD position in February and March of 2008. Long-term traders who take advantage of the positive rollovers are called Carry Traders and will hold a position for a year or more as long as the trend remains intact.

Tom

Money is constantly flowing in and out of different markets, driven by the economic law of supply and demand; likewise, markets that offer the highest return per investment will generally attract the most capital. Countries are no different—in the world of international capital flows, nations that offer the highest interest rates will generally attract the most investment and create the most demand for their currencies.

In foreign exchange trading, the carry trade is an easy way to take advantage of this basic economic principle. A very popular trading strategy, the carry trade is simple to master. If done correctly, an investor can earn a high return without taking on a lot of risk. However, carry trades do come with some major risks, and the chances of loss are great if you do not understand how, why, and when carry trades work best.

How Do Carry Trades Work?

A carry trade is the buying of a currency that offers a high interest rate while selling a currency that offers a low interest rate. Carry trades are profitable because an investor is able to earn the difference in interest—or spread—between the two currencies.*

For example, assume that the Australian dollar offers an interest rate of 7.25%, while the Swiss franc offers an interest rate of 2.75%. To execute the carry trade, an investor buys the Australian dollar and sells the Swiss franc. In doing so, he or she can earn a profit of 4.50% (7.25% in interest earned minus 2.75% in interest paid), as long as the exchange rate between Australian dollars and Swiss francs does not change.

Why Do Carry Trades Work?

Carry trades work because of the constant movement of capital into and out of countries, and interest rates are a critical reason why some countries attract a great deal of investment as opposed to others. If a country’s economy is doing well (high growth, high productivity, low unemployment, rising incomes, etc.), it will be able to offer those who invest in the country a higher return on their investment. Another way to make this point is to say that countries with better growth prospects can afford to pay a higher rate of interest on the money that is invested in them.

Investors prefer to earn higher interest rates and investors who are interested in maximizing their trading will naturally look for investments that offer them the highest rate of return. When making a decision to invest in a particular currency, an investor is more likely than not to choose the one that offers the highest rate of return, or interest rate. If several investors make this exact same decision, the country will experience an inflow of capital from those seeking to earn a higher rate of return.

What about countries that are not doing well economically? Countries that have low growth and low productivity will not be able to offer investors a high rate of return on investment. In fact, there are some countries that have such weak economies that they are unable to offer any return on investment, meaning that interest rates are zero or very close to it.

When Will a Carry Trade Work Best?

Carry trades work better during certain times than others. In fact, carry trades are most promising when investors as a group have a very specific attitude toward risk.

Peoples' moods tend to change over time—sometimes they may feel more daring and willing to take chances, other times they may be more timid and thus prone to being conservative. Investors, as a group, are no different. Sometimes they are willing to make investments that involve a good amount of risk, other times they are more fearful of losses and look to invest in safer assets.

In financial jargon, when investors as a whole are willing to take on risk, we say that they have low risk aversion or in other words, are in risk-seeking mode. On the other hand, when investors are drawn to more conservative investments and are less willing to take on risk, we say that they have high risk aversion.

Carry trades are the most profitable when investors have low risk aversion. This statement makes sense when you consider what a carry trade involves. To revisit, a carry trade involves buying a currency that pays a high interest rate while selling a currency that pays a low interest rate. In buying the high interest rate currency, the investor is taking a risk—there is a good deal of uncertainty around whether the economy of the country will continue to perform well and be able to pay high interest rates. Indeed, there is a good chance that something might happen to prevent the country from paying this high interest rate. Ultimately, the investor must be willing to take this chance.

If investors as a whole were not willing to take on this risk, then capital would never move from one country to another, and the carry trade opportunity would not exist. Therefore, in order to work, carry trades require that investors as a group have low risk aversion, or be willing to take the risk of investing in the higher interest rate currency.

Carry trades are the least profitable when investors have high risk aversion. When investors have high risk aversion, they are less willing as a group to take chances with their investments. Therefore, they would be less willing to invest in riskier currencies that offer higher interest rates. Instead, when investors have high risk aversion, they would actually prefer to put their money in “safe haven” currencies that pay lower interest rates. This would be equivalent to doing the exact opposite of a carry trade—in other words, investors are buying the currency with the low interest rate and selling the currency with the high interest rate.

How Do You Know if Investors as a Whole Have High or Low Risk Aversion?

Unfortunately, it is difficult to measure investor risk aversion with a single number. One way to get a broad idea of risk-aversion levels is to look at the different yields that bonds pay. The wider the difference, or spread between bonds of different credit ratings, the higher the investor risk aversion. Bond yields can be found in most financial papers. In addition, several large banks have developed their own measures of risk aversion that signal when investors are willing to take risks and when they are not.

In general, holding a carry trade is considered to be a risky, longer-term strategy, because an investor has to be willing to hold the position with very wide stop-loss provisions in order to avoid getting taken out by the “noise” of shorter-term currency price movements. However, by utilizing the carry trades at the appropriate times, traders can reap the added potential of interest rate differentials, which is why this strategy rarely loses popularity.

*Please Note: When you trade against a carry trade, or when you sell a currency with a high interest yield and in exchange buy a currency with a low interest yield, you will pay interest, thus increasing your loss on the trade.

Put/Call ratios, short interest and odd lot traders are a few examples of tools used by traders who use sentiment in their trading approach in the stock market. So naturally when these traders test the waters in the FX market, they typically seek similar tools. FXCM is happy to accommodate these traders by offering the Speculative Sentiment Indicator or SSI. The analysts at DailyFX define SSI as:

The FXCM SSI is based on proprietary customer flow information and is designed to recognize price trend breaks and reversals in the most popularly traded currency pairs. The absolute number of the ratio itself represents the amount by which longs exceed shorts or vice versa. For example if the EURUSD ratio is 2.55, long customer orders exceed short orders by a ratio of 2.55 to 1. Conceptually similar to contrarian analyses using the CFTC IMM open position data or COT Report, the SSI provides an alternative approach that is both more timely and accurate in forecasting currency price movement. The SSI is a contrarian indicator that tells you how the market is weighted and where the trend may head. More long positions don't necessary suggest more confidence in the direction of the current trend. In general, when traders start having adverse movements against their position, many tend to increase the size of their position with the purpose to average down their entry price in one last attempt to recover from previous losses. However, the higher the number of short orders in a bull market the more dangerous is to take additional shorts because many of those traders who just entered the markets are also leaving their protective stop losses just above the current price action.

Basically, this indicator measures the trading activity of the small traders at FXCM, traders who typically try to pick tops and bottoms. So the stronger a move up, the more these traders sell into that move. As the market continues to move up, they will buy those positions back at a loss and add more fuel to the move up. So the higher the ratio of buyers to sellers or sellers to buyers, the more likely the move against that position. For those of your who have traded futures, this is used similar to how traders use the Commitments of Traders (COT) Report by the Commodity Futures Trading Commission (CFTC) on positions in the futures markets. Here is a copy of last Thursday’s SSI Report:



I typically look for extremes when using this type of information in my analysis. Just recently we did see an extreme with about 80% of those holding positions in the USD/CAD had bought and were holding long, which works out to a ratio of 4.05 buyers for every seller. This means the chance of a move down had increased. The important point to keep in mind is that this is not a timing indicator and should be used as a directional bias rather than a signal to enter into the market. But traders who use this sentiment will start looking for a solid sell setup in the USD/CAD to take advantage of this information.

The SSI is available at www.dailyfx.com, with a new report issued every Thursday. Live clients can receive an updated report twice a day at DailyFX+. During the CNBC trading contest, contestants have full access to DailyFX+ at this link: https://plus.dailyfx.com/tnews/loginForm.jsp

You will find the SSI Report in the Intraday Analytics section of the site and I would be happy to answer any questions you have on interpreting and using this report. You can post them right here in the forum.

No matter the technician's method, the goal is to establish a bullish, bearish, or neutral position. Moving averages, momentum oscillators, price patterns, trendlines, and pivot points are all considered technical tools, but there is one characteristic that they all share: all of these tools help the trader determine a point of reference from which to trade against. In other words, all of these tools help the trader establish a bullish, bearish, or neutral position. The following examples illustrate how you can use some of the more advanced methods to establish reference points from which to trade against.
A tool that provides potential support and resistance and therefore helps minimize risk is pivot points. Pivot points are calculated from the previous period’s high, low, and close.


Once the above calculation is complete, the pivot point can be used to calculate estimated support (S1, S2, S3) and resistance (R1, R2, R3) for the current trading period:

Resistance 1 = (2 x Pivot Point) – Low (previous period)
Support 1 = (2 x Pivot Point) – High (previous period)
Resistance 2 = (Pivot Point - Support 1) + Resistance 1
Support 2 = Pivot Point - (Resistance 1 - Support 1)
Resistance 3 = (Pivot Point - Support 2) + Resistance 2
Support 3 = Pivot Point - (Resistance 2 - Support 2)

R1 and S1 project the normal range for the period; R2 and S2 project an extreme range for the period; and R3 and S3 project resistance and support for what a statistician would call a "fat tail" move. In any case, each level can be used as an entry or exit level as the USD/JPY hourly bar chart with weekly pivot points shows.



Over the course of the 5-week period above, R1 and R2 provided fairly accurate resistance points as did S1 and S2 for support. How could you use this information to develop a strategy? Let’s say that in the USD/JPY example above, you are looking for short entries because the USD/JPY is below its 200-day SMA. Rather than shoring at an arbitrary level, you place short orders at R1 with stops above R2. In this same example, you may wish to cover your short positions at S1 or even S2 if given a chance to do so.

Oscillators also provide reference points, albeit more subtly. Oscillators such as RSI reference when price is overbought or oversold. These terms are a bit misleading because a currency pair can remain overbought or oversold for extended periods of time during strong trending markets. A novice may sell a currency pair that is, according to the RSI, "overbought," but regardless of the RSI reading, the pair's price can still continue to increase, which leads to increased demoralization for the novice. One way in which you can filter overbought and oversold readings and find better turning signals is by looking for divergence. Divergence occurs when price and the oscillator (RSI in this case) diverge, in other words, when the indicator fails to confirm a new high or low in price.

Bullish Divergence = a new low in price but NOT in the indicator

Bearish Divergence = a new high in price but NOT in the indicator

However, RSI does not provide a clear reference point in terms of price. For this reason, it is important to combine a tool such as pivot points with divergence signals in order to generate an actual trading signal.



The chart above is of GBP/USD with 60 minute bars, a 14-hour RSI, and weekly pivot points. A significant top occurred at 2.1160, which was signaled by bearish divergence with RSI and stalling at R2. Similarly, bullish divergence at S3 indicated that the initial down leg in the GBP/USD was probably over. As it happened, the GBP/USD spent the next two weeks trading in an upward sloping range.

Pivot points and RSI, when combined; provide reference points that help identify high- probability trade setups. After all, trading is a probability game, and by utilizing technical tools in the way described above, you increase your odds for success.

Click here to receive 12 emails (one lesson a day) to help you gain an edge in trading your currency portfolio.

Have you thought to publish a fx book? I can translate your book into chinese.

I do write for FXCM and my work is included in the courses we offer to traders looking to increase their knowledge on FX trading. These courses are also available in Chinese.

At DailyFX, we always say that we are traders first and analysts second. Each and every one of the analysts on the DailyFX Team actively trade in the markets, and these are some trading lessons that come from our own experience:

Lesson # 1: Don’t Ignore the Warning Signs

When you hear warning signals, listen. One of our analysts felt the initial subprime earthquake and went short US interest rates in anticipation of rate cuts. However, he failed to run for cover when the first waves of destruction started hitting the US economy (e.g. Merrill Lynch, Bear Stearns, and UBS all started revealing colossal losses tied to subprime problems). He assumed that stocks would rally in the months ahead because of the rate cuts and subsequently went long USD/JPY. Obviously, USD/JPY has fallen over 1,000 pips since then, but now he knows that when the sea is receding from the coast, he should assume that a tsunami is coming, run for cover, and come back to the market when the volatility drops to levels that are more normal.

Lesson # 2: Don’t Be Right in Your Analysis, but Miss the Trade

If you’ve been thorough in your analysis and feel confident that a trade could be profitable, take the position! What are you waiting for? You may be missing out on profits. For example, one of our analysts saw potential in 2007 for EUR/USD to rise from 1.34 to 1.48 and for USD/CAD to fall below parity. However, she didn’t take the trade, and by the time her strategy flashed buy and sell signals on these currency pairs, the stops were much larger than she was normally comfortable with (100 pips or less). However, the eventual rewards were far greater than the 150 to 200 point risk that was needed, and by adjusting her position size to risk the same dollar amount but taking a wider stop, she could have been on board for a trade that would have reaped major profits.*

Lesson # 3: Trust Your Methodology

You must have a methodology by which you go about your trading business and you must trust it; otherwise you are not operating in a business-like manner, but rather a chaotic manner. And where there is chaos, there is nothing. For example, one of our analysts identifies market extremes in his trading, relying primarily on sentiment indicators and Elliott Wave counts. At one point, COT positioning indicated that the JPY was very oversold and GBP was very overbought. His wave count (with Fibonacci extensions) indicated that the top for GBPJPY should be near 250.00. Following his strategy, he put in orders to sell GBPJPY at 250.50 and every 50 pips up until 252 with a stop above 253. As GBP/JPY approached 250, he got nervous, cancelled everything, and followed the crowd to go long. As it happened, the GBP/JPY top was at 251.10 and within one month, the pair fell to 219.30. Had he stuck to his initial strategy, he would have made a handsome profit; but instead, he received a margin call because he was long.*

Lesson # 4: Take the Time to Find the Best Trade, Don’t Rush into It

Keep a trading log: It forces you to think through your idea because you have to write it down. By thinking about the trade instead of rushing it, you will be more critical and more selective in choosing the best trades to take. Additionally, a written record provides you with an opportunity to review your thought process so that you can replicate the successful ideas and modify the unsuccessful ones. For example, one analyst liked CAD to the short side but chose AUD/CAD instead of USD/CAD because he was rushing the trading idea and forgot to check the calendar for event risk, which was negative for the Aussie. Now, he always makes sure to check the calendar as part of his process of keeping a diary of trades.

Lesson # 5: Know When to Cut Your Losses

Don't be stubborn: Conditions change all the time, whether they are fundamental or technical in nature. It's easy to stay too focused on one particular thing, such as a support/resistance level, to the point that you become "confident" it will play out your way. When it doesn't, quit. Establish stop-loss levels beforehand, know when to cut out of your position, and don't sit and try to wait for your trade to work out the way you want it to.

*Leveraged foreign exchange trading carries a high level of risk, and may not be suitable for all investors. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose.

Kathy Lien of DailyFX.com sits down with Sue Herera of CNBC to discuss "The Five Things that Move the Currency Markets".

Hey everyone,

On a daily basis, I write up a 'Currencies Update' for the CNBC website which discusses what the traders with the top 3 portfolio balances have been doing. I'll be posting it in here from now on as well, and hopefully it'll provide you with tips and a little bit of news coverage as well:

Volatility Draws Traders to the Japanese Yen, British Pound

Volatility in the currency markets has its pros and cons. On the plus side, the rapid shifts in price action can be exciting for traders and when price is moving in their direction, it can make trades profitable rather quickly. On the other hand, an increase in volatility can raise the risk of unexpectedly reversals, which can quickly knock out a trader’s stop on a given position.

On Tuesday, a pick up in volatility in the Japanese yen worked in favor of the contestant with the largest portfolio balance in the currency trading portion of the contest. Indeed, this trader was in first place on Monday and stayed in the top spot with a balance of $256,520.77 by taking profits on a large USD/JPY position. Contestant number 1 entered a long position on Sunday evening near 105.30 and caught the majority of Monday and Tuesday’s USD/JPY rally. This position alone is what allowed contestant number 1 to stay ahead, as he closed his USD/JPY long near 107.20, netting him over $34,000.

Meanwhile, contestant number 2 has been trading another volatile currency: the British pound. He has done well with this currency versus the US dollar, as he finished Tuesday with a portfolio balance of $182,775.46 thanks to the plunge in GBP/USD down toward 1.9550. However, contestant number 2 entered another short GBP/USD position on Tuesday afternoon around 1.9540, and he is still holding the pair.

The pair initially plummeted during the European trading session to test 1.9500 in reaction to a bigger-than-expected gain in UK jobless claims, as they rose by 9,000 during the month of May. This does not bode well for growth prospects in the UK, as the country’s labor markets have started to show a clear deterioration, while the housing sector collapses and the trade deficit widens to record levels. Sound familiar? There are major concerns within the Bank of England that the UK is in for a US-style economic slowdown or possible recession. However, also like the US, price pressures are building rapidly, and these inflation concerns will prevent the UK central bank from seriously considering additional rate cuts in the near-term.

Despite the initial GBP/USD weakness we saw this morning, contestant number 2 is floating a hefty loss in this position as the start of the New York trading session has seen the pair rocket higher. The move is due primarily to pronounced US dollar weakness versus the Japanese yen. Likewise, the euro has fallen significantly against the low-yielding yen, as these pairs tend to have a strong correlation with US equities. Indeed, the DJIA has started the day on a weak note, as the index tests the most recent lows near 12,195/200. Risk aversion is making a comeback in the markets, especially as a pick up in crude oil adds fuel to widespread inflation concerns, and this creates significant downside potential for the Japanese yen crosses, like USD/JPY and EUR/JPY.

Contestant number 3 may be better equipped for a return to risk averse sentiment in the markets, as he is currently holding a short GBP/JPY position that he entered just above 210.00. Thus, with a portfolio balance of $181,111.82 as of Tuesday’s close, this trader will likely knock contestant number 2 out of the running by this evening’s close. Nevertheless, there is still event risk for the forex markets looming on the horizon today, as the Federal Reserve’s Beige Book report will be released at 14:00 EDT. There is little doubt that additional regions will report a pick up in prices throughout the economy, but traders should keep an eye on how districts report growth conditions. In the last Beige Book release, 9 of the 12 districts indicated a slowdown in growth, and if additional districts report the same thing, the news could weigh heavily on the Japanese yen cross and the US stock markets.

Congratulations to our top traders and good luck!

Terri Belkas, Currency Analyst of DailyFX.com

Strong US Retail Sales May Keep Dollar Bullish Traders On Top

Contestant number 1 continues to dominate, as he has held the top spot for the past 3 days and ended Wednesday with a portfolio balance of $249,699.90. However, this is actually lower than his balance on Tuesday, as he lost money trying to sell EUR/USD and GBP/USD on Wednesday morning, when both pairs rallied. Nevertheless, contestant number 1 is so far ahead of the other contestants that it would take a significant loss to even put his position at risk. Furthermore, our leader looks set to make up for his recent losses as he entered a long USD/JPY position last night just below 107. The pair is already up over 100 points and contestant number 1 is floating more than $20,000 in profits. While it is not actually considered a “profit” until the position is closed, this trader has the release of US Advance Retail Sales working in favor of dollar bulls.

Indeed, according to the US Commerce Department, retail sales rose by the most in 6 months during May, as the index jumped 1.0% from the month prior. Excluding autos, this figure was even more optimistic as the index surged 1.2%. A breakdown of the report shows broad-based gains, but the most notable change was in the gasoline station component, which increased 2.6% from a month ago and 15.3% from a year earlier. Since this report is not adjusted for inflation, this rapid increase skews the headline reading a bit, as average gasoline prices in the US steadily rose above $3.50/gallon toward $4/gallon over the course of May. Nevertheless, nearly every other component showed improvements as well, including building materials (+2.4%), general merchandise (+1.2%), and electronics (+0.7%). The news will help to alleviate some of the bearish sentiment on the US economy as consumption – which accounts for roughly 70% of GDP – rebounds despite deteriorating labor market conditions and withering consumer confidence. Meanwhile, the US Import Price Index jumped 17.8% in May from a year earlier – the sharpest gain since record-keeping began in September 1982 – as the weak US dollar makes foreign goods more expensive. Overall, it is clear that rising prices remain a problem, which could constrict spending going forward but will likely leave the Federal Reserve maintaining their hawkish stance.

Contestant number 2, on the other hand, reaped her most recent gains by shorting USD/CHF on Wednesday, leaving her with a closing portfolio balance of $197,822.34. Like USD/JPY, the USD/CHF pair tumbled over the course of the day on Wednesday as the markets were widely risk-averse as crude oil rocketed higher and the DJIA plummeted over 200 points. However, she does not have any positions open right now, and as we’ve seen throughout the contest, it takes active trading to stay in the top 3.

On the other hand, contestant number 3 has maintained his spot despite the fact he only gained a few hundred dollars on Wednesday and ended the day with a portfolio balance of $181,532.14. This contestant prefers to trade GBP/JPY on a very short-term time frame, and while he had a few very profitable trades, he had enough small losing positions to erase most of his gains. Currently, contestant number 3 is holding a large long GBP/JPY position, which he bought at 209.76. The pair is currently trading within a tight range, and we tend to find that consolidations like these lead to massive breakouts. As a result, where GBP/JPY goes today will likely determine this trader’s spot in the top 3 tomorrow, as a drop lower will easily take a chunk out of his portfolio balance.

Congratulations to our top traders and good luck!

Terri Belkas, Currency Analyst of DailyFX.com

US CPI, Ireland's Rejection of EU Treaty Weigh On EUR/USD

Since the start of the currency trading portion of the contest just over three weeks ago, contestant number 1 has made over $170,000, as he ended Thursday with a portfolio balance of $271,770.58. Indeed, the leader has held the top spot for the past 4 days, as his portfolio is ahead by approximately $76,000, which will make it difficult for other traders to take his place. His strategy of focusing on USD/JPY, EUR/USD, and GBP/JPY and holding positions for 1-5 days appears to be working well for him. As we mentioned in yesterday’s Currencies Update, contestant number 1 entered a long USD/JPY position on Wednesday evening just below 107. The pair has since rallied over 100 points, but it remains to be seen how USD/JPY and the other yen crosses will hold up over the course of the day given the release of the US Consumer Price Index this morning.

Headline CPI was stronger than expected in May, as the index jumped 0.6% – the biggest single month gain since November 2007 – while the annual measure hit a 4-month high of 4.2%. Unsurprisingly, the increases were led by energy prices, which were up 4.4% during the month and have surged 17.4% from a year earlier. On the other hand, core CPI – which excludes food and energy prices – only rose 0.2% during May while the annual measure held steady at 2.3%. Overall, this data will only add to the Federal Reserve’s inflation concerns, and futures continue to price in a 20% chance of a 25 basis point rate hike to 2.25% at the end of the month. This sort of sentiment is inherently dollar bullish, however, the news could be bearish for US stock markets and thus, negative for the yen crosses. Indeed, we tend to see a correlation between pairs like USD/JPY and EUR/JPY and the DJIA.

One place we could see the dollar bullish sentiment come into play is in GBP/USD, which is the one position contestant number 2 is holding. This trader ended Thursday with a portfolio balance of $194,915.71, due primarily to multiple short-term trades in the pair. Contestant number 2 sought to capitalize on the US CPI data and sold GBP/USD after the release. The pair has gone little changed since the pair initially dropped from 1.9450 toward 1.9415, and this position could make or break this traders spot in the top 3.

Meanwhile, like GBP/USD, we saw EUR/USD respond immediately to the US CPI data as the greenback surged, but the pair has simply consolidated between 1.5315 – 1.5350 since then. Contestant number 3, who ended Thursday with a portfolio balance of $192,907.14, actually bought EUR/USD near 1.5330 early this morning as the pair stabilized following sharp declines during the European trading session. While it is possible that EUR/USD could rebound, there are substantial fundamental factors weighing the pair down. First, of course, is the stronger-than-expected US inflation data. Next, the euro is currently grappling with news that Ireland’s referendum on the Lisbon Treaty has resulted is a “no” vote. Approval of the Lisbon Treaty would have streamlined governance of the EU, as it would create an EU president and foreign minister, and reduce the EU Commission from 27 to 18 members with rotating membership in order to speed up the commission's work. The rejection of the Treaty could spark a bit of political turmoil in the Euro-zone, which is never a good thing for a currency. However, the final results from the country's 43 constituencies are not due until later in the afternoon, so this may be a story worth watching.

Congratulations to our top traders and good luck!

Terri Belkas, Currency Analyst of DailyFX.com

One of the main differences between a stock market and the FX market is that the FX market is a true 24 hour a day market. Trading is continuous around the clock and really only is closed on weekends due to the lack of volume rather than an actual close. The result of this is that you very rarely see gaps on the FX related charts. A gap is when the open of one session is far enough away from the previous close to leave an actual gap on the chart. There can be many gaps on stock market related charts since the market stops trading late in the afternoon and will not reopen until early the next morning. If a company’s earnings is released after the close, the next day’s opening price can be much higher or lower than the previous close. Any news item that causes a shift in the opinion of the value of the market can result in a gap on the chart. In the FX market, you do not see these gaps during the week as the market is open and trading. However, you can see gaps between the Friday closing price and the Sunday open. When you see a gap on a chart, the first thing many traders will look for is for the market to move back to fill the gap. If the market gaps from 1.2500 up to 1.2525, traders will look for a move back down to 1.2500 to fill that gap and then reevaluate the news and its influence on the trend. We can see where this is exactly what happened in the first example on the chart below as the market opened higher than the previous close and eventually moved back down to fill that gap before continuing on with the uptrend. We also can see that in the second example, the market opened lower and then move up to fill the gap. So even though this market is different from other financial markets, there are enough similarities for traders to apply their approach to the FX market and experience similar results.

Attached Images

 

G8 Meeting, US Empire Fed Data Fuel Dollar Losses

A combination of weak US manufacturing sector data, a lack of commentary on currencies at the G8 meeting over the weekend, and a surge in European inflation has sparked volatility across the forex markets this morning. With our top 3 traders focusing primarily on USD/JPY and EUR/USD, the significant moves in the US dollar could make or break who stays high on the leaderboard.

For the fifth consecutive day, we have the same contestant in the number one spot as this trader ended Friday with a currency portfolio balance of $277,671.42. His most recent gains were on the back of a few long USD/JPY positions, which he entered last Wednesday just below 107. At the time of writing, contestant number 1 was still holding on to these positions. USD/JPY is currently trading near 108, and while this trader’s holdings are still profitable, we’ve seen the pair back down from resistance at the 200 SMA at 108.26. Indeed, the US dollar remains very weak on Monday morning on a combination of a few factors. First, the G8 meeting over the weekend in Japan failed to yield significant commentary on currencies, as the attending finance ministers instead focuses on inflation. This was a major chance for government officials to help stem the US dollar’s declines, and instead, their silence has only worsened the situation.

Also weighing on the US dollar is news that the New York Federal Reserve's gauge of manufacturing activity fell more than expected in June to -8.7 from -3.2 on the back of negative readings in the components measuring new orders, shipments, and unfilled orders, suggesting that activity in the manufacturing sector continues to decline. A further breakdown of the report reflects a surge in input prices, which is unsurprising given the gains we've seen in commodity prices in recent months. However, the prices paid component actually eased slightly, indicating that producers may be having difficulty passing down rising costs to consumers. Meanwhile, the employment index showed that the "number of employees" barely managed to remain positive at 1.16, while the "average workweek" tumbled to -2.33 from 1.09, which signals that instead of letting go workers outright, manufacturing firms are cutting back on their hours worked. Overall, the Empire Fed reports highlights the weaknesses in the sector, and suggests that additional downside risks loom for the US economy, which will likely prevent the Federal Reserve from raising rates at the end of the month despite mounting consumer price pressures.

Meanwhile, contestant number 2 – who ended Friday with a portfolio balance of $208,922.99 – cracked the $200K mark by catching the plunge in EUR/USD during European trading on Friday, and by buying the pair shortly after to benefit from the rebound over the course of the New York trading session. Indeed, these moves made contestant number 2 over $35,000 in profits in a matter of hours. Can he do it again on Monday? Contestant number 2 bought EUR/USD again this morning as the pair started to break above 1.5500. However, the pair has already rallied nearly 150 points from the morning’s low of 1.5344, so he may actually be a little late to the game.

Nevertheless, as we mentioned above, the combination of the outcome of the G8 meeting and the disappointing Empire Fed data do not bode well for the greenback. Furthermore, the final reading of the Euro-zone Consumer Price Index for the month of May unexpectedly hit a fresh 16-year high of 3.7%. The data underpins European Central Bank President Jean-Claude Trichet’s hawkish bias and suggesting that the ECB will like raise rates next month, as their primary mandate is to maintain price stability. As we discussed in the Currencies Update on June 6, Mr. Trichet said following the last ECB meeting that some council members actually wanted to raise rates this month and also said during the Q&A session that there was a chance that the central bank would raise rates in July. As a result, there is a lot of bullish support for the euro from a fundamental perspective, leaving upside potential for EUR/USD.

Like contestant number 2, contestant number 3 made his way to the top 3 on the back of profits in EUR/USD. However, this particular contestant prefers to trade on a very short-term basis and has kept positions open for as little as 10 minutes. For the most part this has worked in his favor, but contestant number 3 was on the wrong side of EUR/USD this morning and lost nearly $12,000 on a single trade, suggesting that his portfolio balance may not be high enough to stay on top by Monday’s close.

Congratulations to our top traders and good luck!

Terri Belkas, Currency Analyst of DailyFX.com

Kathy Lien of DailyFX.com sits down with Sue Herera of CNBC to discuss "Different Ways to Trade the Currency Market".