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The euro fell to a one-week low against the greenback on Wednesday, a day before the European Central Bank is expected to add further stimulus in a bid to boost the region’s economy.
ECB policymakers are leaning toward a package that includes a rate cut, a beefed-up pledge to keep rates low for longer and compensation for banks over the side-effects of negative rates, five sources familiar with the discussion said last week. Many also favor restarting asset buys, but opposition from some northern European countries is complicating this issue.
The mere thought of easing is probably keeping the euro on the defensive at the moment, said Shaun Osborne, chief currency strategist at Scotiabank in Toronto. However, were not completely on side with expectations of an aggressive ease we think there may be a rebound in the euro after the policy meeting tomorrow.
The euro was last down 0.31% on the day at $1.1009.
The yen was the weakest since Aug. 1 as optimism over U.S.-China trade talks boosted risk sentiment and reduced demand for safe havens.
China announced its first batch of tariff exemptions for 16 types of U.S. products, days ahead of a planned meeting between the two countries to try and de-escalate their bruising tariff row.
The dollar gained 0.20% to 107.74 yen.
Sterling also dipped after a Scottish court ruled on Wednesday that Prime Minister Boris Johnson’s suspension of the British parliament was unlawful, prompting immediate calls for lawmakers to return to work as the government and parliament battle over the future of Brexit.
The British pound fell 0.19% to $1.2322.
U.S. data on Wednesday showed that U.S. producer prices unexpectedly rose in August and underlying producer prices rebounded, but that data will not change financial market expectations that the Federal Reserve will cut interest rates again next week to support a slowing economy. This weeks major economic focus will be consumer price inflation data on Thursday and retail sales data on Friday.
Over the past few years, US prosecutors fined more than a dozen banks $11.8 billion over allegations of collusion and manipulation in the FX market - a case that helped upend the culture of traders sharing "market color" in Bloomberg chatrooms. Those same banks have reached other settlements over behavior tied to the 'FX Cartel' not only in the US, but also in the UK, with the initial round of penalties coming in 2015.
But in what has become an unceasing loop of punishments, prosecutions and fines, not unlike the rate-rigging and the LIBOR manipulation scandal, it's now Europe's turn.
NEU Competition Commissioner Margrethe Vestager on Thursday announced that five banks had agreed to pay fines totaling €1.07 billion ($1.5 billion) after colluding to "rig" currency markets to benefit their trading books.
The UK and the US have already prosecuted FX traders involved in some of the chat rooms, which had names like the "Essex Express n’ the Jimmy" (named for the commuter train many of the traders traveled on) and "Semi Grumpy Old Men", with mixed success. Traders were accused of using chat rooms on their Bloomberg terminals to collude about their positioning.
Barclays, Mitsubishi UFJ Financial Group, Citigroup, RBS and JPM have agreed to pay the fines. Citigroup got hit the hardest - it will pay €310 million ($347.65 million), according to Bloomberg.
The Europeans are investigating other violations, and could bring more fines in the not too distant future. A case in the US involving similar charges is ongoing in the US, the only difference being the US is fining BNP Paribas instead Mitsubishi. The banks in that case have agreed to pay more than $2.8 billion in exchange for a guilty plea.
Swiss bank UBS was exempted from a fine since it was the first to alert authorities to the existence of the chat rooms (it ratted on its rivals), according to CNBC.
In a statement, Vestager said the investigation took six years.
"Companies and people depend on banks to exchange money to carry out transactions in foreign countries.Foreign exchange spot trading activities are one of the largest markets in the world, worth billions of euros every day," EU Commissioner Margrethe Vestager said in a press release Thursday.
"Today we have fined Barclays, The Royal Bank of Scotland, Citigroup, J.P. Morgan and MUFG Bank and these cartel decisions send a clear message that the Commission will not tolerate collusive behavior in any sector of the financial markets. The behavior of these banks undermined the integrity of the sector at the expense of the European economy and consumers," Vestager added.
The EU investigation that has been ongoing for the past six years revealed that some individual traders from various banks...exchanged sensitive information and trading plans through various online professional chat rooms.
"The information exchanges...enabled [the traders] to make informed market decisions on whether to sell or buy the currencies they had in their portfolios and when," the Commission said in its report.
Whatever else happens, the fact that these banks needed to collude to make money makes us question the notion that the slump in the big banks' FICC trading revenues was caused by 'market conditions.' Maybe their traders just aren't as effective without their morning dose of "market color".
Losses are accelerating as VIX surges to its highest since January.
VIX is back above 20
Treasury yields are at 6-week lows...
And The Dow is down 500 points - breaking below 26k and its 50DMA...
But Trannies are the worst on the week...
* * *
Update (1200ET): No dip-buyers yet...
Dow is back below 26,000, looking to fill that March gap...
VIX has exploded back above 20...
* * *
Update (1100ET): Things are getting worse in stockland... Nasdaq futures have plunged since the initial opening bounce, back below yesterday's lows...
Trannies are the worst post-Tariff-tweets, down 2.5%.
* * *
Treasury yields are tumbling as US equity markets re-plunge after some overnight gains on Liu headlines.
Dow futures are down over 300 points...
Dow futures are back below the 50DMA...
But Nasdaq futures are the laggard, near yesterday's lows...
And Treasury yields are back below pre-FOMC levels...
Tyler Durden - Zerohedge
In this past weekend’s missive, we discussed the market stalling at the 200-dma. To wit:
“We said then the most likely target for the rally was the 200-dma. It was essentially the level at which the ‘irresistible force would meet the immovable object.'”
“What will be critically important now is for the markets to retest and hold support at the Oct-Nov lows which will coincide with the 50-dma. A failure of that level will likely see a retest of the 2018 lows.”
“A retest of those lows, by the way, is not an “outside chance.” It is actually a fairly high possibility. A look back at the 2015-2016 correction makes the case for that fairly clearly.”
“But even if a retest of lows doesn’t happen, you should be aware that sharp market rallies are not uncommon, but almost always have a subsequent retracement.”
Importantly, as I expanded to our RIA PRO subscribers:
“We are likely going to have another couple of attempts next week as the bulls aren’t ready to give up the chase just yet. We are continuing to watch the risk carefully and have been working on repositioning portfolios over the last couple of weeks.
As noted, we lifted profits at the 200-dma and added hedges to the Equity and Equity Long/Short portfolios.”
On Monday, the markets rallied a bit out of the gate over continuing hopes of a “trade deal” between the U.S. and China but fell back to even by the end of the day. With earnings season now largely behind us, the “bulls” are going to need improving economic data and relief from Washington to provide continued support for the rally.
This morning, futures are once again pointing higher on news that a proposal is ready to be sent to the President providing just $1.4 billion for border “security,” no wall, to avert another Government shut down. It is highly likely the bill will be rejected by the President and he will start talking about the use of a “national security” issue to fund the building of the wall. This will divide Congress even more than it is already almost ensuring NO legislation passes before the end of the President’s first term.
Also, talks are once again starting with China over trade. This is also buoying markets in the short-term in hopes of a resolution to reduce the impact of tariffs on businesses. Hopes for a noteworthy “deal” remain extremely slim at this point.
But those two issues are actually relatively minor as other issues, as noted on Saturday, will actually bear much more weight on the market going forward.
Earnings estimates for 2019 have sharply collapsed as I previously stated they would and still have more to go. In fact, as of now, the consensus estimates are suggesting the first year-over-year decline since 2016.
Stock market targets for 2019 are way too high as well.
Despite the Federal Reserve turning more dovish verbally, they DID NOT say they actually WOULD pause their rate hikes or stop reducing their balance sheet.
Larry Kudlow said the U.S. and China are still VERY far apart on trade.
Trump has postponed his meeting with President Xi which puts the market at risk of higher tariffs.
There is a decent probability the U.S. Government winds up getting shut down again after next week over “border wall” funding.
The effect of the tax cut legislation has disappeared as year-over-year comparisons are reverting back to normalized growth rates.
Economic growth is slowing as previously stated.
Chinese economic has weakened further since our previous note.
European growth, already weak, will likely struggle as well.
Valuations remain expensive
Of course, despite those more macro-concerns, the market has had a phenomenal run from the “Christmas Eve”lows and has moved above both the Oct-Nov lows and the 50-dma. This is clearly bullish in the short-term for investors. With those levels of previous resistance now turned support, there is a little cushion for the bulls to hold on to.
The biggest hurdle for a bullish advance from current levels is the cluster of resistance sitting just overhead. Sven Heinrich noted the market remains stuck below the collision of the 200-day, the 50-week, and the 15-month moving averages.
As shown, this set up previously existed back in late 2015 and early 2016. The initial challenge saw the market actually break back above the cluster of resistance, which “sucked the bulls” back into the market before setting new lows.
The correction, that was then in process, was cut short by massive infusions of global liquidity as I discussed yesterday:
“Global Central banks had stepped in to flood the system with liquidity. As you can see in the chart below, while the Fed had stopped expanding their balance sheet, everyone else went into over-drive.”
Another concern for a further rally is that investor allocations never got extremely bearish. The chart below compares the S&P 500 to various measures of Rydex ratios (bear market to bull market funds)
Note that during the recent sell-off, the move to bearish funds never achieved the levels seen during the 2015-2016 correction. More importantly, the snap-back to “complacency” has been quite astonishing. The next chart puts it into a longer-term perspective for comparison.
Despite the depth of the decline, and the belief that the “bear market” of 2018 is now complete, it is worth noting the reversion in investor positioning has not even begun to approach levels seen during an actual “bear market.”
But stepping back to the long-term trends, when managing money the most important part of the battle is getting the overall “trend” right. “Buy and hold” strategies work fine in rising price trends, and “not so much” during declines.
The reason why most “buy and hold” supporters suggest there is no alternative is because of two primary problems:
Trend changes happen slowly and can be deceptive at times, and;
Bear markets happen fast.
Since the primary messaging from the media is that “you can’t miss out” on a “bull market,” investors tend to dismiss the basic warning signs that markets issue. However, because “bear markets” happen fast, by the time one is realized, it is often too late to do anything about it.
So, you just have to ride it out. You don’t have any other option. Right?
The chart below is one of my favorites. It is a monthly chart of several combined indicators which are excellent at denoting changes to overall market trends. The indicators started ringing alarm bells in early 2018 which is when I begin talking about the end of the “bull market” advance.
Currently, every single monthly indicator, as of the end of January, is currently suggesting downward pressure on the market. The only signal which has yet to confirm is the cross of the 15-month and 21-month moving averages. The 21-month moving average has pretty much been both support and/or resistance, to the overall trend of the market for the past 25-years. At present, the market is “trapped in the middle” between those two monthly averages.
If the bull market is going to resume, the market needs to break above the 15-month moving average and rally enough to reverse the torrent of sell-signals running across the complex of price indications. With earnings and economic growth weakening, this could be a tough order to fill in the near term.
So, for now, with our portfolios underweight equity, overweight cash and fixed income, we remain “stuck in the middle with you.”
What are some things that separate a good trader from a great one? Guts, instincts, intelligence and, most importantly, timing. Just as there are many types of traders, there is an equal number of different time frames that assist traders in developing their ideas and executing their strategies. At the same time, timing also helps market warriors take several things that are outside of a trader's control into account. Some of these items include position leveraging, nuances of different currency pairs, and the effects of scheduled and unscheduled news releases in the market. As a result, timing is always a major consideration when participating in the foreign exchange world, and is a crucial factor that is almost always ignored by novice traders.
Tutorial: Beginner's Guide To MetaTrader 4
Want to bring your trading skills to the next level? Read on to learn more about time frames and how to use them to your advantage.
Common Trader Time frames
In the grander scheme of things, there are plenty of names and designations that traders go by. But when taking time into consideration, traders and strategies tend to fall into three broader and more common categories: day trader, swing trader and position trader.
1. The Day Trader
Let's begin with what seems to be the most appealing of the three designations, the day trader. A day trader will, for a lack of a better definition, trade for the day. These are market participants that will usually avoid holding anything after the session close and will trade in a high-volume fashion.
On a typical day, this short-term trader will generally aim for a quick turnover rate on one or more trades, anywhere from 10- to 100-times the normal transaction size. This is in order to capture more profit from a rather small swing. As a result, traders who work in proprietary shops in this fashion will tend to use shorter time-frame charts, using one-, five-, or 15-minute periods. In addition, day traders tend to rely more on technical trading patterns and volatile pairs to make their profits. Although a long-term fundamental bias can be helpful, these professionals are looking for opportunities in the short term. (For background reading, see Would You Profit As A Day Trader? and Day Trading Strategies For Beginners.)
|Source: FX Trek Intellicharts|
One such currency pair is the British pound/Japanese yen as shown in Figure 1, above. This pair is considered to be extremely volatile, and is great for short-term traders, as average hourly ranges can be as high as 100 pips. This fact overshadows the 10- to 20-pip ranges in slower moving currency pairs like the euro/U.S. dollar or euro/British pound. (For more on pairs trading, see Common Questions About Currency Trading.)
2. Swing Trader
Taking advantage of a longer time frame, the swing trader will sometimes hold positions for a couple of hours - maybe even days or longer - in order to call a turn in the market. Unlike a day trader, the swing trader is looking to profit from an entry into the market, hoping the change in direction will help his or her position. In this respect, timing is more important in a swing trader's strategy compared to a day trader. However, both traders share the same preference for technical over fundamental analysis. A savvy swing trade will likely take place in a more liquid currency pair like the British pound/U.S. dollar. In the example below (Figure 2), notice how a swing trader would be able to capitalize on the double bottom that followed a precipitous drop in the GBP/USD currency pair. The entry would be placed on a test of support, helping the swing trader to capitalize on a shift in directional trend, netting a two-day profit of 1,400 pips. (To learn more, read The Daily Routine Of A Swing Trader and Introduction To Types Of Trading: Swing Traders.)
|Source: FX Trek Intellicharts|
3. The Position Trader
Usually the longest time frame of the three, the position trader differs mainly in his or her perspective of the market. Instead of monitoring short-term market movements like the day and swing style, these traders tend to look at a longer term plan. Position strategies span days, weeks, months or even years. As a result, traders will look at technical formations but will more than likely adhere strictly to longer term fundamental models and opportunities. These FX portfolio managers will analyze and consider economic models, governmental decisions and interest rates to make trading decisions. The wide array of considerations will place the position trade in any of the major currencies that are considered liquid. This includes many of the G7 currencies as well as the emerging market favorites.
With three different categories of traders, there are also several different factors within these categories that contribute to success. Just knowing the time frame isn't enough. Every trader needs to understand some basic considerations that affect traders on an individual level.
Widely considered a double-edged sword, leverage is a day trader's best friend. With the relatively small fluctuations that the currency market offers, a trader without leverage is like a fisherman without a fishing pole. In other words, without the proper tools, a professional is left unable to capitalize on a given opportunity. As a result, a day trader will always consider how much leverage or risk he or she is willing to take on before transacting in any trade. Similarly, a swing trader may also think about his or her risk parameters. Although their positions are sometimes meant for longer term fluctuations, in some situations, the swing trader will have to feel some pain before making any gain on a position. In the example below (Figure 3), notice how there are several points in the downtrend where a swing trader could have capitalized on the Australian dollar/U.S. dollar currency pair. Adding the slow stochastic oscillator, a swing strategy would have attempted to enter into the market at points surrounding each golden cross. However, over the span of two to three days, the trader would have had to withstand some losses before the actual market turn could be called correctly. Magnify these losses with leverage and the final profit/loss would be disastrous without proper risk assessment. (For more insight, see Forex Leverage: A Double-Edged Sword.)
|Source: FX Trek Intellicharts|
Different Currency Pairs
In addition to leverage, currency pair volatility should also be considered. It's one thing to know how much you may potentially lose per trade, but it's just as important to know how fast your trade can lose. As a result, different time frames will call for different currency pairs. Knowing that the British pound/Japanese yen currency cross sometimes fluctuates 100 pips in an hour may be a great challenge for day traders, but it may not make sense for the swing trader who is trying to take advantage of a change in market direction. For this reason alone, swing traders will want to follow more widely recognized G7 major pairs as they tend to be more liquid than emerging market and cross currencies. For example, the euro/U.S. dollar is preferred over the Australian dollar/Japanese yen for this reason.
Finally, traders in all three categories must always be aware of both unscheduled and scheduled news releases and how they affect the market. Whether these releases are economic announcements, central bank press conferences or the occasional surprise rate decision, traders in all three categories will have individual adjustments to make. (For more information, see Trading On News Releases.)
Short-term traders will tend to be the most affected, as losses can be exacerbated while swing trader directional bias will be corrupted. To this effect, some in the market will prefer the comfort of being a position trader. With a longer term perspective, and hopefully a more comprehensive portfolio, the position trader is somewhat filtered by these occurrences as they have already anticipated the temporary price disruption. As long as price continues to conform to the longer term view, position traders are rather shielded as they look ahead to their benchmark targets. A great example of this can be seen on the first Friday of every month in the U.S. non-farm payrolls report. Although short-term players have to deal with choppy and rather volatile trading following each release, the longer-term position player remains relatively sheltered as long as the longer term bias remains unchanged. (For more insight, see What impact does a higher non-farm payroll have on the forex market?)
|Source: FX Trek Intellicharts|
Which Time Frame Is Right?
Which time frame is right really depends on the trader. Do you thrive in volatile currency pairs? Or do you have other commitments and prefer the sheltered, long-term profitability of a position trade? Fortunately, you don't have to be pigeon-holed into one category. Let's take a look at how different time frames can be combined to produce a profitable market position.
Like a Position Trader
As a position trader, the first thing to analyze is the economy - in this case, in the U.K. Let's assume that given global conditions, the U.K.'s economy will continue to show weakness in line with other countries. Manufacturing is on the downtrend with industrial production as consumer sentiment and spending continue to tick lower. Worsening the situation has been the fact that policymakers continue to use benchmark interest rates to boost liquidity and consumption, which causes the currency to sell off because lower interest rates mean cheaper money. Technically, the longer term picture also looks distressing against the U.S. dollar. Figure 5 shows two death crosses in our oscillators, combined with significant resistance that has already been tested and failed to offer a bearish signal.
|Source: FX Trek Intellicharts|
Like a Day Trader
After we establish the long-term trend, which in this case would be a continued deleveraging, or sell off, of the British pound, we isolate intraday opportunities that give us the ability to sell into this trend through simple technical analysis (support and resistance). A good strategy for this would be to look for great short opportunities at the London open after the price action has ranged from the Asian session. (For more, see Measuring And Managing Investment Risk.)
Although too easy to believe, this process is widely overlooked for more complex strategies. Traders tend to analyze the longer term picture without assessing their risk when entering into the market, thus taking on more losses than they should. Bringing the action to the short-term charts helps us to see not only what is happening, but also to minimize longer and unnecessary drawdowns.
The Bottom Line
Time frames are extremely important to any trader. Whether you're a day, swing, or even position trader, time frames are always a critical consideration in an individual's strategy and its implementation. Given its considerations and precautions, the knowledge of time in trading and execution can help every novice trader head toward greatness.
Unfortunately, as it many times happens, the mistakes of the few have impacted the many (or perhaps the other way around in this case, not so sure on this one). Unregulated brokers that have plagued the Forex and CFD trading industry, along with binary options brokers have prompted a drastic response on behalf of the supranational EU-wide industry watchdog.
Again… I am assuming you are not from Mars, but just in case Elon did manage to insert you inside the spaceman suit on that roadster, here are the changes to regulations in brief. Maximum leverage for trading FX has been cut to 1:30, indices and gold are at 1:20, other commodities are at 1:10 and shares are at 1:5.
Brokers are required to provide a negative balance protection and display clearly on their marketing message what is the percentage of their clients that lose money. Yes, exactly, that must read like something similar to: “come along and deposit some money with our brokerage, we hope you are not one of the 90 percent of poor folks that lose money.” (You might as well add a smiley face at the end, just for color.)
We are going to have a look at the impact on the industry from two different perspectives. The first one is that of brokers that are acting as principals and are internalizing their flow. The so-called ‘market makers’ are likely to get more materially affected by the changes mandated by the ESMA.
The reason for that is that such brokers are typically more reliant on direct marketing, trading incentives, and most crucially, their clients losing money. Higher leverage always means a shorter life-span for a retail trader’s account. Low levels of leverage are the preferred way to trade for institutional investors, where big drawdowns in the account balance are quite unwelcome.
Brokers have been offering high leverage to clients in order to lure them into the narrative that it is easy to make a lot of money with a relatively small deposit. The reality in the financial markets however, is that, as described by the ESMA, between 80 and 95 percent of retail clients are losing their deposits.
So when a market-making broker attracts a client with say 1:400 leverage, the likelihood that the holder of this account will be bust within three months is very high. A switch between fear and greed emotions in the brain chemistry is one of the most perilous enemies of a trader.
Trading the market is catering to these emotions and short bursts of dopamine when a trader is winning are driving their desire to trade more. Curiously, some social media users are experiencing precisely the same pattern that lures them into continuing to stick to that phone screen on the train.
The levels of leverage which the ESMA is mandating are automatically slamming the breaks on excitement levels. Suddenly a trader has to deposit $5000 to open a position sizeable enough to change one’s life. When previously $500 were enough, this makes a huge difference. Brokers will need to change their acquisition and retention strategy altogether to stay on top of their game when attracting clients.
After we established some of the potential risks for market makers, let’s focus on STP brokers. Straight-Through Processing (STP) is a different mode of operation for the retail brokerage industry. Such firms are not relying in any way on the losses of their clients, as the money in those accounts is flowing into the market.
The revenue of the brokerage is relying on commissions. The more trades a trader makes within their lifespan, the more commissions the brokerage is getting. As a result, we can deduce that such brokerages are keen on their clients not losing money, because they will stop generating commissions to the brokerage the moment they lose their balance.
Such brokers are typically more inclined to provide their clients with added value tools that can drive a mediocre trader closer to success. The ESMA’s new regulations are going to have an impact on such companies in two major ways.
The first one is trading volumes. Granted, broker trading volumes will register a decline, and probably, at least initially it will be big. Leverage restrictions, however, have had a mixed impact on other markets. In Japan, for example, the official maximum leverage of 1:25 has not impacted the industry in the long run as local brokers are posting the highest trading volumes in the world.
Capital requirements is another issue. All brokers are now mandated to provide negative balance protection and the FCA was one of the first regulators that suddenly realized that having firms with a capital requirement of a couple of hundred grand was no longer adequate. All STP firms are very likely to need to apply for a 730.000 euro ($900.000) license and prepare to meet the capital requirements that come with that.
Last but not least, I want to pay some explicit attention to a subject that has not been discussed enough. That is the disclaimer that every broker has to accompany their advertisement messages with a line reading ’90 percent of our clients lose money!,’ or something of the likes.
The ESMA’s announcement has just created a great new incentive for brokerages and that is to attract the best possible traders. This will inevitably result in a paradigm shift for good practice in the industry. Suddenly attracting traders is not enough, brokers that want to remain in this industry for the long haul will have to attract the right kind of clients and strive to make their clients better traders all the time.
Not many brokers have been working in this direction, and even fewer have been successful in doing so. Education will no longer be an extension of retention. I am referring to a number of products that are branded as education but the only thing they do is confuse a trader even more and completely disconnect them from the reality of the market: it is very hard to make money trading.
I hope that many brokers manage to succeed in the quest to teach traders how to trade. It has been a long and hard way for the few that remain in this business. In the meantime, those phony educators that are acting akin to affiliates are now becoming something closer to a bad practice for every broker who is committed to having a good ratio of profitable traders.
As the final rules are published by the ESMA and as local regulators start chipping in with circulars, we will know more details. But for now, it is well worth thinking about how you are going to approach this brand new market starting from a couple of months from now.