Carry Trade Panic Selling?

Did anyone notice the panic selling out there?

All kinds of carry trades unwound several hundred points in a very short period of time. Speculation in the Forex news rags suggests that losses due to the falling stock exchanges forced people to unwind their carry trades to cover their margins.

In any case, after days of regimented downward movement, the sudden fallout represented a panic moment -- for someone. In the short term, at the very least, this should represent opportunity. I've stuck my toe in.

I certainly don't know if it represents a bottom, but if everyone that wanted out got out, then it won't have much pressure to fall further.

Personally, I'm looking at the Yen based carry trades. Things like the EURJPY, GBPJPY, and the AUDJPY. While the US may eventually recover and raise interest rates, I don't see the Japanese being able to raise interest rates while their currency is appreciating.

How in the world would they compete internationally, exporting products, if they drove their prices up now when everyone else looks to be faltering already?

Have I mentioned lately how important it is to have money on the sidelines so that you can take a poke at raging opportunities? Whether or not you are a fan of his, Jim Cramer also is a proponent of not being fully invested -- which he states is a common joe public trader type of mistake.

Big opportunities offer big profits, but only if the opportunity didn't break you as it was developing.

Forex Fun and Profit with Correlations

What is the first thing that comes to mind when you think of Forex trading? I'm willing to bet that it isn't fun.

Well, recently I've been enjoying trading a little more than usual.

While doing a bit of reading I found a link talking about currency correlations. Go take a look at the charts provided (scroll down a bit). Notice anything? Generally, when a currency pair you are holding rises or falls, there is another currency pair that is moving in a different direction.

I know, this shouldn't be a revelation to anyone, should it?

However, if you open positions in two currencies that have a high negative correlation you will often see one of them being profitable in the near term. Then, if you are careful, you can pick good moments to close and reopen your offsetting positions. Furthermore, if you generally participate in carry trades, as I do, you'll have an ability to enter more positions with less variability in your drawdown.

Of course, don't get me wrong, this does entail a higher level of risk. At the very least you must be aware that a correlation present now may suddenly disappear or reverse at any time. Alternately, once you open or close a trade at what appears to be an opportune moment, the market may move unexpectedly while you don't have an offsetting currency pair. This is nothing new, but if you are trading a higher percentage of your NAV you will be exposed to higher risks.

Personally, I use an account with a small relative balance for this type of trading. When I am making profits I siphon much of them out into an account that is not exposed to such a high level of risk. As a bonus, highs and lows demonstrated in the correlations account indicate good entry points in my less risky accounts.

So, where's the fun? The fun is in seeing profitable positions a majority of the time. It's in having just about any move, and it's reversal, present an opportunity to you in one currency or another. The long periods of waiting and boredom are reduced. All you have to do is be willing to accept some risk on an account set up for this purpose.

Addendum: In the last 12 hours the NAV on my high risk account increased by 5.66%! Now that's fun. I've closed all open trades as it's time to start the work day...

Forex Turmoil: Still On The Sidelines

During the last few weeks of topsy-turvy price movements I've been playing it safe. I like to buy carry trade pairs, but they've been heading down a lot.

Now, the big question, when will things start to turn around? A few of the pairs are getting into historically low valuations. For example, take a look at the GBPJPY pair on google finance -- click the 5yr option when it loads.

Sure, we could set new lows, perhaps for a months or years, but the odds of the UK having lower interests rates than Japan seems rather extreme. At some point, when things do finally settle down in another year or more, the GBPJPY will start to get attractive.

Other pairs, such as GBPUSD or EURUSD, which represent a bet against the US dollar make me nervous. While there is a possibility that some parts of the world, notably Australia, New Zealand and Asia, can avoid a recessionary period it's also very possible that the sinking US dollar will create a large enough trade advantage to shift the slowdown from the US to other countries as their own companies find it harder to compete internationally.

Anyway, I don't know how it will play out and from what I've learned buying a currency without having a clear notion of what you expect to happen is akin to gambling. Sure, you can be wrong when you believe something, but at least then you aren't throwing your money at the toss of the dice... and often it is possible to figure out what is going on to some degree.

So, for now, I'm keeping an eye on the JPY crosses. Perhaps the AUDJPY, EURJPY, GBPJPY and CADJPY will find themselves showing up in my account?

Forex Market Turmoil

My recent excellent trading week was followed by a less than stellar week. Basically, I was caught by surprise when the US markets, and hence the US dollar, started to make a comeback.

I've been cutting my teeth in the forex market for over a year now, but this entire period has been associated with a weakening US dollar. The market mechanics seem to be changing around -- so I'm finding it more difficult to trade. Currencies aren't bouncing off their bollinger boundaries anymore and instead are trading flat for extended periods of time.

There's no good indication of future expections coming out of a flat line. Plenty of indicators, such as stochastics, become worthless when they are operating on moves of only a few pips. They are no longer able to predict entry points that are very likely to coincide with meaningful price moves.

In light of all this, I've swapped much of my capital into my low risk carry trading account.

I'm learning, slowly, that it's all about preservation of capital. In uncertain times hunker down and protect what you have. When things start to operate according to your plan you can then bring out the big guns and start working within those more favorable conditions.

Don't try to force the market to give you money. If it's acting counter to what you are used to then it's time to regroup and figure out what is going on. For example, if the US markets start to show signs of an underlying economic recovery, we'll be able to expect US interest rates to rise. We could be in for several years of US dollar recovery while the Eurozone, which hasn't swallowed as much medicine, may still have to work out some issues.

Obviously, I'm not certain on the timing, but when the market participants who exited the dollar return to it, you don't want to be on the wrong side of that trade.

Forex - An eye on the market

Forex traders can either work in a bank or in a company,' says Gary Lai, front office manager of recruitment firm Robert Walters. 'For most of these corporations, the traders are there for hedging purposes, but in banks, there is a group of proprietary traders who trade for profits for the bank.'

'The long-term prospects are not good, given that, in the near future, the world is heading towards a few currencies only. First, the euro. And in the Americas, the US$ is a de facto single currency, while Asia is thinking about having one currency too. So the volatility has dropped a lot, making trading harder.'
- a forex trader

The traders make money for their institutions by buying currency and selling it later at a higher price or, if they anticipate that the market is heading down, by selling at a high price first and buying back at a lower price later.

A forex trader working at a bank in Singapore describes the job as 'straightforward'. 'The person speculates which way the currency will move, much like equity traders. However, the forex market is much bigger,' he says. 'For example, if you expect the US dollar to appreciate against the Japanese yen, then you as a forex trader will buy USD so that you can sell it off later.'
As currency prices are constantly on the move, forex traders are inevitably subjected to a fast-paced environment which Mr Lai describes as 'a pressure cooker'. 'Even during lunch breaks, (traders) cover for each other; you bring lunch back and eat at your desk,' he says, adding that 'even when you go for toilet breaks, the markets can just move'.

Due to the high pressure that the job entails, traders should have certain characteristics.
'A good forex trader is highly adaptable, decisive and has the ability to think out of the box, especially in volatile situations,' says Angela Kuek, manager, banking and financial services of recruitment company Hudson. 'He has a steady mind, stays cool and is not easily distracted, veering off course from positioning strategies. He should have an eye for opportunities and precision.'
Mr Lai shares similar sentiments: 'To be successful in forex trading, or any trading for that matter, a person has to be very numbers-driven, able to take calculated risks; and be a very calm, collected person who doesn't get scared of losing money overnight.'

In addition, a trader should be up-to- date with current world issues which influence forex markets. 'He or she is constantly at the forefront of happenings and movements in the global financial markets,' says Ms Kuek.
Interestingly, these traits take precedence over academic qualifications. 'In the past, when you look for a trader, it's all track record. But these days, many traders have degrees, except for the European and American traders,' notes Mr Lai. 'Many brokerage houses (in Europe and the United States) don't require traders to have degrees; they need personality.'

However, he acknowledges that degrees are 'a given these days', especially in Asia.
The forex trader from the bank agrees that 'most banks would like to see at least a university degree', adding that when job interviews are conducted, the questions are 'secondary; the primary assessment will be based on the personality'.

Forex trading: a pressure cooker

Even with a driven personality, a trader's career life span tends to be short because of the high-stress work, reports QUAH CHIN CHIN

HAVING a career in foreign exchange (forex) trading often comes at a price, both literally and figuratively. It is exciting and lucrative - according to a survey last September by the Bank for International Settlements (BIS), trade on global currency markets is worth more than US$3.2 trillion daily. This is approximately equal to the annual economic output of Germany, the world's third-largest economy.

Closer to home, Singapore is the world's fifth largest forex centre, with an annual daily turnover of US$231 billion.
Despite the whopping figures, forex trading is often fraught with risks and pressure. In this article, we give you a run-through on the important aspects for a career in forex trading.

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