December 2, 2013 in Forex Analysis
As we run into the end of 2013, we typically see liquidity in the market shrink back as a lot of the professional money starts to square up its positions in order to report performance and wind down for the year. Low liquidity environments tend to have exaggerated price swings as stops are run by some of the bigger players but there is typically little follow through afterwards in terms of trend development. Reading the price action can be challenging but we can get clues from the positioning of retail traders such as that reported by FXCM’s SSI or the community outlook on MyFxBook. For example, last week we saw retail traders quite heavily short GBPUSD (80% of traders are short presumably because they are playing a range trade as GBPUSD is at the top of its daily chart range). These positions were squeezed on Friday in the thin Thanksgiving holiday volume. I saw some signs of chart painting making it look like the range trade was starting to work only for the pair to suddenly turn late Friday afternoon and go after the stops above 1.6350.
We constantly need to remind ourselves that trading is a metagame and obvious set ups do not work and are indeed a trap. A metagame is any strategy, action or method used in a game which transcends a prescribed rule-set, uses external factors to affect the game, or goes beyond the supposed limits or environment set by the game. Wikipedia has some nice examples here. http://en.wikipedia.
I heard a figure once (unverified) that there is something close to $400 billion of retail trader money sloshing around in the forex market every day. With sums like this at stake, it should not be a surprise that there is smart money (hedge funds, brokers) intent on exploiting the dumb money (retail trader accounts). The bigger brokers like FXCM which has an amazing 450k retail trader trades per day have heat maps that show them in detail where stops are located and I understand MT4 is even configured in such a way as to facilitate the brokers to do this. So as retail traders this is what we are up against.
Performance last week was +0.85% on AVA and flat on Shelbourne Markets.
The dollar index looks pretty indecisive right now with lots of mixed signals. The dovish Janet Yellen appointment has not inspired confidence in the dollar despite taper expectations. The economic calendar has a lot of event risk ahead this week with the BOE and ECB rate decisions this Thursday coupled with lots of US economic data releases.
EURUSD – The price action ball is being kicked around in the centre of the pitch between the bulls and the bears. Any directional call here is a risky bet and it is much better to wait to see how the price behaves at range extremes
GBPUSD – As mentioned above this pair is at the top of its daily chart range. If the dollar index starts looking better, it could retreat to 1.6100 which is a nice risk reward set up from current levels. Against this is the ‘too obvious’ argument above. The best way to play it is the PSAR add approach I now use. See p10 here http://www.fisic.ie/media/
FisicFinancialReport2_RW_MA_ PSAR.pdf for more info. on a PSAR approach.
USDJPY- The yen is being sold by the market. I will be looking for USDJPY longs when we get a shakeout. The yen pairs such as GBPJPY, EURJPY, CHFJPY are way overbought. So much so the latter pair is worth looking at for a short.
USDCHF – This is the pair I like if we finally see a dollar rally. If the dollar index can get above 81.00 and hold it has lots of room to the upside. I will be looking to add to positions.