Whore of the World

No institution in modern times is as vile, insidious, corrupt, evil and disgusting as a Central Bank.

It is a whore that has stradled the globe, copulating and spreading its version of syphilis, namely inflation, in an orgy of debt and cheap credit.

The biggest whore of them all, is the Federal Reserve.

Reuter reports that a Depression risk might force U.S. to buy assets. Really? How will this work?

"Fear that a hobbled banking sector may set off another Great Depression could force the U.S. government and Federal Reserve to take the unprecedented step of buying a broad range of assets, including stocks, according to one of the most bearish market analysts."

What is so bad about the Fed and U.S. govenment buying a broad range of assets, including stock? Effectively, if the Fed buys an asset, it means that the asset is monetized, or turned into cash for the seller. The money paid by the Fed doesn't exist.

During a normal transaction, a buyer and seller exchanges money for goods. The money used actually exists. It comes from the existing money supply (assuming the transaction doesn't involve credit).

The money offered by The Fed and/or government to conclude the transaction is money added to the current money supply, also known as inflation.

That extreme scenario, which would aim to stave off deflation and stabilize the economy, is evolving as the base case for Bernard Connolly, global strategist at Banque AIG in London.

In the late 1980s and early 1990's Connolly worked for the European Commission analyzing the European monetary system in the run up to the introduction of the euro currency.

"Avoiding a depression is, unfortunately, going to have to involve either a large, quasi-permanent increase in the budget deficit -- preferably tax cuts -- or restoring overvaluation of equity prices," Connolly said on Monday.

"If conventional monetary policy is not enough to produce that result, the government may have to buy equities, financed by the Fed," Connolly said.

What is so bad about deflation. It corrects the wrong created by inflation. It washes out the excesses and brings the market back to equalibrium.

"While Connolly already sees some parallels with the 1930s, he expects that a more pro-active central bank and government will probably help avert a repeat of that scenario today.

The build up of a credit bubble in recent years was similar to the late 1920s run-up to the Great Depression, he said."

Wrong. The perception that a more "pro-active Central Bank and Government" will avert a repeatof is flawed.

Continued interferance by The Fed and government only postpones and further inflates the inevitable correction.

The Reuters article is based on a worst case scenario and might not even materialise. However, if you catch a wiff of The Fed resorting to these type of tactics, be prepared for a monetary meltdown.

How to Socialise Risk

What does it mean when a government "socializes" something? The answer is quite simplistic.

When a government socialiszes something, it means that it is incurring a cost to do something, and that cost is transferred to the taxpayer. Northern Rock in the U.K. is an excellent example and illustrates The Economic Incompetence of Socialism.

The Wall Street Journal reports on the attempts by banks to get government to "socialize" some of the risk THEY took on:

"The banking industry, struggling to contain the fallout from the mortgage debacle, is urgently shopping proposals to Congress and the Bush administration that could shift some of the risk for troubled loans to the federal government."

Nice business to be in, this banking business. If going to school was anything like banking, nobody would fail, no matter how dumb you are.

The Fed's Open Checkbook Policy

By Bill Bonner

"Faced with what appeared to be a '70s style slump, Bernanke rushed off in the opposite direction - offering lower interest rates and more cash. He hopes to avoid a recession and - who knows - this morning's news suggests that he may have done the trick."

Read the rest

Dow Jones Musical Chairs - Part 2

I discussed the chopping and changes made on the Dow in Dow Jones Musical Chairs

Mark Hulbert at Marketwatch touches on the same issue: What happens to Stocks added and deleted form the Dow?

According to Norman Fosback, editor of Fosback's Fund Forecaster, the Dow would today be more than twice its quoted level had IBM not been removed in 1939.

Are these examples typical of all changes made over the past 110 years? I don't know, since I have not gone back and calculated the returns of all stocks that were added or deleted to the Dow subsequent to its creation in 1896. But I wouldn't be surprised if the average deleted stock has outperformed the average addition.

That's because companies that are added often are coming off a period of dynamic growth. A company that is substantially out of favor typically does not get added. This skews the Dow towards the large-cap growth sector of the market, which historically has underperformed smaller stocks and issues that are closer to the value end of the value-growth spectrum.

Therefore, to follow the Dow's moves is not a very good way to track the performance of the US stock market.

I suggest you rather monitor the Willshire 5000 index, which represents the broadest index for the U.S. equity market. This should give you a better indication of where the market is heading.

January US Retail Sales are Down

In nominal terms, Retail Sales might be up 0.3%, if you can trust those figures.

However, the picture changes if you deduct CPI. If you use the US Government CPI of 4.1%, real sales are down to -3.8%.

If you use the CPI value of Shadow Stats, which estimates CPI at around 7.5%, then Retail Sales are down -7.2%! That makes more sense. I can not see how Retail Sales can grow when business is scaling back. Shedding more light on this, Mike Shedlock asks the question, Does The Shopping Center Economic Model Work?

The hype reflected on the stock markets over statistics like this, leaves me cold. Is this a sucker trap being used by big players to offload shares onto the next fool ?

I just can not see any valid reason for equities to go up in the current local and global economic environment.

FX Insights Trade Team Update 13/02/2008

By FX Insights Moderator,


Yet again we have another tame day in the market... but, we have some things to discuss and consider...

First, lets talk about today's retail data -- to my surprise and the market's surprise, the data was a big upside surprise... we did see the euro back-off initially, but I think we saw limited downside as the market was probably thinking the same thing I was: downward revision coming next month...

I don't believe those numbers at all, but hey, I have to play the hand I'm dealt...

As far as Eurozone industrial data goes, as we forecasted, it disappointed to the downside, coming in at -0.2% vs. an expected 0.5%. Once again we have more proof and evidence that growth is slowing in the Eurozone and this will put pressure on the ECB to cut rates at least once this year... stay tuned as this story continues to play out in the weeks to come...

Fundamentally, we have a monster day tomorrow. We start with key German, French, and Eurozone GDP, and I do mean this is key as GDP is a tremendous measure of growth... I'm not convinced we'll see any mega downside disappointments as this data is somewhat lagging as it relates to the real-time growth situation, but I'm certainly not going to be surprised if the data comes in softer than expected as growth is certainly slowing in Europe...

Then we have U.S. Trade Balance, Initial Claims, Bernanke, followed by Trichet...

With the USD remaining terribly weak, I would suspect a decent Trade Balance, the key for the USD is for the Trade Balance to come in at or lower than expected... a softer number would keep additional pressure on the dollar vs. the euro...

As far as Bernanke and Trichet goes, I have no clue what they will say... either one could make things sound really good or really bad, so it's anyone's guess... lately, Bernanke has remained dovish on economic conditions and dovish on interest rates... Trichet has started growing more dovish on growth but remains hawkish on rates... so, prepare for anything!

EUR/USD:

As we spoke about yesterday, the euro is trading within a somewhat confusing range... it's still making higher lows, but again, we bounced hard off of 4600 and came down...

We flirted around the 4550 key level, eventually to move up and stay over during the duration of the NY session, but as I type this, the euro's moved back into the 4560's...

I have to assume the market is waiting for tomorrow's big data... but the longer we stay in this tight and weird range, the higher the probability grows that we need to make a bigger move soon... maybe the market will wait for tomorrow of Friday to do it...

I'm trading the range and playing things extremely tight... I only took two trades today, which is about the least I've taken in a single trade day all year, and I will certainly not keep my accounts exposed to any risk heading into tomorrow's big fundamental day, I suggest you do the same...

Price Action:

Staying on the recent topic of price action and using EUR/USD 30-minute price openings, I'd like to give you another perfect price pattern that played out right before our eyes this morning... we were discussing it in the chat and I know quite a few traders took a trade based on this price pattern and took some easy profits from the market...

Here's what we observed:

At the 10:00 a.m. price opening, we saw the euro make a bottom in the 4530's and then move up to the 4580's... leading us to the bottom of the range was a very consistent consecutive pattern of lower half hour price openings, and it played out beautifully to show us what the support was and where to get in on a good euro long that would pay at least 20 pips... this pattern, of course, paid out much more than 20 pips...

6:00 a.m. -- 4592 (high opening of range)
6:30 a.m. -- 4587 (1st lower opening)
7:30 a.m. -- 4584 (2nd lower opening)
8:00 a.m. -- 4582 (3rd lower opening)
8:30 a.m. -- 4581 (4th lower opening)
9:00 a.m. -- 4574 (5th lower opening)
9:30 a.m. -- 4544 (6th lower opening)
10:00 a.m. -- 4538 (7th lower opening/euro reaches bottom)

So, holding true to typical EUR/USD price action patterns, we have 7 straight lower price openings, we hit a bottom, and then we move up about 50 or so pips to the top of the day's range...

Honestly, it can't get much easier than this... I know a lot of traders tell me they still have no understanding or concept of using this price action pattern technique, but it's as simple as writing down the opening price and counting to 7... it's just that easy... if I could break it down and make it easier I would, but if you can write numbers and you can count to 7, you should be able to use this powerful indicator...

Does the the euro always follow this same exact pattern? Of course not, there is no such thing as always in the FX market... but we've seen this same exact pattern play out thousands and thousands of times, so the probabilities are there for sure...

Yesterday, Yeno called a live trade in the chat to short the euro at 4600 and today the trade was closed for a nice 50 pip profit:

Click on Image

Finally, I have two new posts about fulltime currency trading that you'll probably want to take a look at...

Being a fulltime trader PART I
Being a fulltime trader PART II

That's all for now, see ya in the chat

-FX Insights

Becoming a Full Time Forex Trader - Part 1

By FX Insights Moderator,

There’s a lot of things in this market that I’m not an expert on, but I do trade professionally fulltime, so based on what I know and based on my own personal experiences of trading this market 24/6, I’d like to offer a few thoughts for consideration.

Although I’ve only been trading since October of 2006, I put in about 80 hours a week watching the market, tracking the global markets, researching the market fundamentals, and trading the EUR/USD…

I have to be honest and say this – I would never recommend or push someone to trade fulltime, especially if you have a young family or you’re a homebody… this life of fulltime trading is not conducive to family life… for me, I love to go out and socialize, but I’ve had to let that go to a great degree in order to pursue my goals as a currency trader in addition to the demands of maintaining this FX community…

That being said, I would never discourage anyone from trading fulltime… if you have your heart and passions set on trading fulltime, fantastic, I support you 100% and I can promise that the FXI community will do everything in our power to help you succeed.

First, I think there’s a few questions you need to ask yourself and have solid answers for:

1. Why do I want to trade fulltime?
2. Can I emotionally handle trading in the most volatile market known to mankind?
3. Am I prepared for this pursuit to drastically change my life for better and for worse?
4. Are my family and loved ones supporting me in my endeavors?

There are probably a few more questions you should ask yourself, but I think those are the important issues to work out in your heart and mind… if you’re at peace with the decision to go fulltime, your next job is to put together a game plan for how you’re going to get started…

Do you have to quit a job? Do you have to reduce your living expenses? Do you have to payoff debt to get that off your back? You get the idea… you have to mentally and physically prepare your body for the new life you’re about to lead…

If you’re loaded down with debt, or you’re having trouble making ends meet, or you have to take a home equity loan to fund an account large enough to trade fulltime, you better think twice!

OK, now that we have all the touchy-feely stuff out of the way, lets get practical…

Risk and money management:

You might be getting tired of hearing us talk about the importance of risk and money management, but that is the #1 key to surviving and profiting in Forex. Risk management is the foundation of trading and it’s the pinnacle of trading – and everything in between!

Honestly, you could make the stupidest trades ever, you could short range bottoms and long at range tops, and as long as you’re using proper risk management techniques, you’ll likely survive the market until it turns around and goes the other way and your negative entries turn into positive ones…

Establish strict risk management rules for your trading… some of my risk management rules are:

1. Only making between 1% and 2% entries per trade
2. Keeping my usable margin above 90% at all times and in all market conditions
3. Typically not stacking my entries closer than 20 pips apart (unless market conditions dictate otherwise)
4. Not taking new entries when the market opens on Sunday
5. Not adding new entries in the afternoon on Fridays

Those are some of my personal risk and money management rules. You have to establish your own. Write them down and commit to following them in all market conditions no matter what – you must stay consistent and organized in all that you do!

There are several posts in our forums about risk and money management, so I won’t beat this horse to death, because I know you’re smart enough to grasp the concepts and importance of risk management – the key is applying this to your trading and being consistent.

Establishing your personal trading style:

Trading is not an exact science… I cannot tell you the “right” or “wrong” way to trade. But you have to establish a style and system of trading that fits your needs. The only way you’re going to establish your own personal system for trading is by experience.

Trading styles largely can be established and defined by your personality… for example, my personality is more on the adventure, explorer, risk-taker, act first and think later type level… and that’s put me in trouble before as I would over leverage and over trade my accounts… so, I can’t let that aspect of my personality interfere with my trading style and my management of risk.

But, the other sides to my personality of attention to detail, hard work, open to knew ideas and knowledge, etc. have worked to benefiting my trading style.

The other part of establishing your trading style has to do with what “indicators” you use to decide when to enter and when to exit a trade. I use the term indicator simply for lack of a better word, but the point is there has to be something you see in the market to cause you to get into a trade and then to get out of trade, whether it is for profit or loss…

Most of you know this already, but for my personal trading style, I rely on these indicators:

1. Overall market fundamentals/economics
2. Price action and price action patterns
3. Following market correlated variables such as gold, oil, equities, securities, and commodities
4. Watching real-time price action
5. Closely watching and following moves by central banks and central bankers

Those are most of the biggies. I must say that I wasn’t able to fully develop my own trading style until I completely understood how this market works and why the market moves the way it does. And that is one main area that 95% or more of all retail traders never grasp.

Sadly, most retail traders go the way of using tech indicators and nobody ever teaches them what really causes market movements and nobody teaches them the patterns of the market. That’s why we spend so much time trying to educate traders on the reality of this market and not the fallacy of using techs.

As far as my trading style goes, I’d have to say the most important thing is price action and tracking the EUR/USD 30-minute price openings. It took me 6 months to learn it, but when the light bulb finally went on, it’s changed my trading for the better and I know this technique will never fail me.

I believe price action is the best indicator for trading the EUR/USD – it’s what works for me, and it’s what makes me the most money and gives me the most success in the market. The key for you is to establish what works best for you. My benchmark for successful trading is something that gives me 9 wins out of 10.

If using techs is your key to success, wonderful, more power to you. I can’t trust something that’s lagging, but again, if you win the most using them, beautiful. I prefer predictive indicators which is why I’m also very fundamental and why I try to think like a bank trader and not a retail trader trading off of Fib lines or MACD’s or EMA’s, which have nothing to do with anything in this market.

Moving on…

Reaching expert status:

98% of my trades, if not more are EUR/USD. I have put all of my energy, my heart, and my soul into learning every single thing I can about the EUR/USD, about its fundamentals, about its patterns, about its price action, etc. I have learned all of the key fundamental reports and how they could affect the market. I’ve learned to read the body language of Ben Bernanke and Jean-Claude Trichet… I’ve learned how the banks trade the EUR/USD, I’ve spent thousands of hours starring at the EUR/USD prices flash on my trade station…

This is just my opinion, but I believe if you want to trade fulltime, you have to focus on one pair and become an expert on it. The EUR/USD offers me enough trading opportunities to make a living from. The more I’ve focused my attention on just trading that pair, the more success I’ve had in the market. I can tell you just about everything about the EUR/USD’s fundamentals, about how and why it moves, etc.

I could write a novel on it if somebody put a gun to my head and made me. I don’t want to sound arrogant, but I want to drive the point that I feel the key is becoming an expert on just one pair and sticking to it.

I probably know enough about the cable, yen, and Swiss to make money on them, and I used to trade them in addition to the euro, but I don’t do that anymore and I’m a much more profitable trader for it. I save my margin for trading the euro.

Even though I feel like I’m an expert on the EUR/USD doesn’t mean I should try to be an expert on another pair, I don’t even want to, in fact, because I think it would take away from my success trading the euro. Reason being, the market is constantly evolving and changing… market conditions are constantly changing, fundamentals are constantly changing, and market sentiment is constantly changing… so, it’s my job to stay one step ahead of the market and one step ahead of the evolution constantly happening with the EUR/USD and with the market… I haven’t learned it all, and my mind is constantly open to learning new things!

--END OF PART I--

Becoming a Full Time Forex Trader - Part 2

ROI:

I don’t care what anybody says, ROI (return on investment) is king in the FX market. It’s not about how many pips you can make in a day or in a month, it’s all about ROI, and how you trade your account to achieve that ROI…

In the world of investing, if you can beat the S&P/500, which is making about 15% ROI annually, you are pretty much a trading god. The key is how you arrive at your ROI, which goes back to risk management and not over leveraging your account.

Every once in awhile a retail broker will have a trading contest to see who can gain the most ROI in a month. Those contests are a joke and are a terrible way to teach risk management, because it causes traders to over leverage…

When it comes to ROI, I suggest setting a monthly goal for yourself… if you want to do 20% ROI per trade month, you need a game plan to safely get you there… you can even break this down to daily ROI goals. For me, I try do 1% ROI per day… some days I do more, some I don’t meet the goal, but I’m not going to go crazy on my accounts to hit that goal…

If you are going to trade fulltime to support your lifestyle you absolutely must know how much ROI you’re going to need to make on a weekly or monthly basis and then you have to trade your account in such a way to not only meet your ROI goal, but so you can safely withdraw funds from your account without putting any open trades in jeopardy of a margin call – not very easy to do!

You could have a balance of $50,000 but have 10 open entries that have sucked your usable margin down to $5,000, and a situation like that keeps you held hostage to the market… you’d not be able to remove funds because your usable margin will not allow… this is a critical factor when it comes to trading fulltime and trying to live off of your trades!

Not trading with your wallet:

There’s two ways to trade this market – either with your wallet or with risk capital. Trading with your wallet causes you to be emotional, take make dumb, emotional decisions, to over leverage your account, to over trade your account, and to take unnecessary risks. Trading with your wallet basically means trading with money you really can’t afford to lose – trading with rent money, trading with mortgage money, trading with food money, trading with your kid’s college money, etc.

Trading with your wallet is going to put so much stress on you that you’ll end up trading like an idiot and you’ll make idiotic decisions… it prevents you from seeing the market clearly and from making smart trade decisions.

In a way, trading fulltime for a living is like trading with your wallet, however, your account should be funded with risk capital… using risk capital keeps you in a much better psychological state of mind and it keeps your emotions from getting the best of you…

How much money should a fulltime trader have in their account? My opinion is a minimum of $50,000 to $75,000 to get started. It really depends on what kind of returns you need your account to give you to support your lifestyle. But I think any less than that will keep you held hostage to the market…

And please don’t get tripped up on account size… percentages are always the same… a 1% used margin entry is the same on a 5K account and a 50K account… percentages never change! 1% is 1%, no matter what…

If you have to take out a second mortgage on your home, or you have to get a title loan, or if you have to borrow cash from a credit card to fund a fulltime trading account, I can pretty much guarantee you’ll crap it out within 6 months and then you’ll be really screwed.

Continuing this point… I suggest you have set aside at least 6 to 9 months of living expenses before you go fulltime. In the event you can’t pull living expenses from your trading account, at least you have your bills covered for 6to 9 months while you get your account in shape to make withdraws. Don’t leave anything to chance!

Pick a broker:

Bottom-line – most retail brokers suck… they stop hunt, they manipulate prices, they play games, they take the opposite side of your trade, they don’t educate traders, etc. So you have two choices, go with a typical retail broker like FXCM, IBFX, Oanda, DBFX or go with an ECN like Hotspot or MB Trading or whatever…

There are advantages and disadvantages to a retail shop or an ECN, but you have to decide what works best for your needs and for your trading style. If you use stops and keep your trades exposed to stop hunting, you might do better with an ECN… if a feature like a user-friendly platform is more important, you might do better with a retail broker as opposed to an ECN.

Once you decide what type of brokerage you want to run your trades through, then you need to pick your broker. Trust me, some are worse than others… FXCM has the most user-friendly platform on God’s green earth, but of course they play typical retail broker games… an ECN like Hotspot is not known for stop hunting and they have lower pip spreads, but the platform is atrocious…

Talk to the brokerage, talk to their customer support, to their tech support and get a feel for how friendly and helpful they are… talk to other traders who use their services to see what kind of issues they might experience. Our community is a great place to do this…

Do you want to go with a U.S. broker or a Swiss broker? There are advantages and disadvantages to both… again, you have to weigh the pros and the cons, but I recommend you really take the time to figure out who will work best for your fulltime trading needs.

Suffering pain:

No trader wants to lose money, no trader wants to get margin called, but I honestly think every trader needs to feel the pain and wrath of this market… we trade in a beast of a market and no trader will ever respect this market until it beats them unmercifully… it’s pretty easy to suffer at the hands of this market, so if you’ve already been down that road, don’t make those same mistakes when you go live to fulltime trading…

Trading the spot FX market is like guerilla warfare… at any second you could be attacked… the whole market is against you… in order for another trader to win, you must be the one that looses, that’s how it works in this game… the market will use any and every opportunity to take your money, it shows no mercy, no remorse, and it’s unforgiving…

When I hear about these companies like 4xmadeeasy, it makes my blood boil because there’s nothing easy about Forex and there’s nothing you can do to make it easy… how dare those people even call it that? It blows my mind that they manage to sucker so many people, but it happens… I don’t know how they sleep at night knowing they’ve duped so many people, but I guess they don’t have souls…

Trading FX fulltime is one of the hardest ways to make money and requires the most time, energy, and focus… if you’re not willing to put in the work and the efforts it takes to trade fulltime, don’t do it… stick with your day job and do this as a hobby…

Resources:

Yes I might be biased, but I truly believe the FXI community provides everything a trader would ever need to be successful in this market… I think the principles we teach are solid and proven and tested to work… our community is helpful and kind and giving and serious about seeing traders succeed…

We are 100% committed to only providing accurate and helpful information and not filling your head with crap that doesn’t work and that would lead you down the wrong path…

Point being – fill your trading arsenal with good resources that will help you be the best trader you can be… trading FX fulltime can be so lonely, which is one reason we started FXI in the first place… take advantages of the good resources out there to help traders…

I always get asked what books a trader should read – I don’t have much to recommend… I’ve never read a book on Forex except for Forex Revolution and I never finished the whole thing, to be honest… I’ve never read a book on how to trade, I’ve never read a book on economics, and I’ve never read a book on using indicators… I can’t help you there… there are probably some good resources, though, so ask around…

If I did have to offer a recommendation, I’d probably say to read Jesse Livermore’s stuff… he’s an old school price action trader who made millions in the equities markets in the early 1900's, but lost his millions because he broke his risk management rules… Livermore’s principles are timeless, however…

Consistency:

One thing Cisco has always drilled into our heads is staying 100% consistent in all that we do… consistency is one of the keys to being a successful fulltime trader…

Once you develop your risk management rules, your trading style, your rules for trading, etc., you must stay consistent and stay consistent with your game plan…

I could go on and on about consistency, but this point is pretty cut and dry and I’m sure you understand…

Conclusion:

Those are my thoughts on trading fulltime… that’s who I see it… I’m sure there’s more that could said, but I think this covers the basics… there’s a lot here so read it a few times if you must… after reading this feel free to find me in the chat if you want to discuss any of these points further…

I hope this helps, and like I said, we’re here to support you 100% in your pursuits of being a successful FX trader…

--END OF PART II--