So the time has come to take a look at some of my most recent trades. As usual, I will outline four trades – two winners and two losers – and explain the reasoning behind my entry, both on a fundamental and technical level.
First, let’s just take a moment to address current market economics. To put it simply, the last few months have been crazy. Japan is falling apart, the Eurozone continues to struggle with the threat of contraction and deflation; weak Chinese demand for Australia’s natural resource exports has put pressure on numerous areas of the Australian economy; the disparity between property prices and inflation in the UK has put the Bank of England (BoE) in something of a conundrum (can we raise rates to cool the property market with such low levels of inflation?!); and the Fed has finally stopped its quantitative easing programme and now has to figure out some way to unwind without plunging the US back into financial crisis.
All this has translated to lots of movement in the markets, and has made it difficult to form any sort of firm fundamental bias that can be held for anything more than the short to medium term. So, with this said, let’s look at some trades.
First up, a long trade in the cable. Long-term, I am bearish on the sterling. Why? Well, as aforementioned, the UK property market is heating up – and has been doing so at a fast rate since the end of last year. Annual growth across the UK as a whole is something like 9% on a year over year basis, but in London the figure is much higher. Traditionally, as an economy recovers after a contractionary phase, property prices will increase. So this is normal right? Well, not really. Alongside property market increases, retail activity – and in turn inflation – also generally increases. While we have seen a small – but not marked – increase in consumer spending, it has not translated to any discernible increase in prices. To me, this suggests that the increase in house prices is artificial – in the sense that it is being propped up by cheap money (as a result of extremely low interest rates and easy access to mortgages through the UK government’s help to buy scheme). I predict that as soon as the UK government raises rates, we will see a wave of defaults as first-time buyers with variable mortgages are unable to meet their repayments, and the UK economy will take a turn for the worse. This, however, is long-term. After a prolonged downtrend in the cable, I thought we may get a correction as we head into the latter couple of months of the year. I spotted this trade during the second week of November. The sterling has lost strength versus its US counterpart for the better part of six months, and I was looking for a quick counter trend entry. A bullish pin formed on November 5, and I went long at the day’s close with a target of 1.6165. Unfortunately, better-than-expected jobless data out of the US quickly took over the pair and drove it straight through my stop at 1.5868, less than 24 hours after entry. A triple digit loss – circa 105 pips.
The next trade I will look at was opened on the same day as the cable long I have just covered. Just as with the sterling, teh US dollar has spent the majority of the second half of this year in a bullish trend against its Canadian counterpart. We’ve seen numerous candlestick patterns form over the last few months that have offered up an opportunity to enter long, but – again, just as with the cable – I thought we might see a medium-term correction and so was on the lookout for anything that could offer me a quick counter trend entry. A bearish pin formed on October 16, but it’s long wick left me in a situation where I would have had to take on approximately 115 pips risk, and I wasn’t sure if there was enough momentum in a downside correction to justify this number. I declined the trade, and a couple of weeks later another bearish pin formed at fresh highs that offered me risk of about 70 pips for a reward just shy of 90. Admittedly, this is a little tighter than I normally like to take on, but I entered anyway with the assumption that we could at least get down to 1.13 flat. The day after my entry, we got some bullish momentum on strong US employment data, but this momentum quickly fell flat and about 72 hours after entering and – on November 10 – the loonie took out my target. While I generally try not to read too much into my trades as far as emotions are concerned – they either hit or they don’t – I remember this trade softening the blow of the triple digit cable loss I had taken on the same day.
So having reached my target in the aforementioned trade, I thought the corrective phase was completed in the USDCAD and started looking long. We got some sideways action for a few days, and then on November 18 a bullish pin formed just ahead of 1.13. This gave me the excuse I was looking for, and I went long with what – at the time – I thought was a relatively conservative target of 1.14. Over the next day or two we got some strong bullish momentum in the pair, and I had this trade slated as a certainty. Much to my annoyance, the bears quickly took over and quashed the bulls at a high around 1.1 370 – approximately 30 pips shy of my circa 120 pip target. Weak US data, coupled with a statement by Bank of Canada Governor Poloz that suggested weakening commodity prices would not hit the Canadian economy to the level that some feared, returned the USDCAD to its downside momentum and took out my stop. Luckily, the pin on which I entered gave me a nice risk ratio and I only had to give about 35 pips back to the market. A loser, but not a crippling one.
Finally, let’s end on a positive note and look at a winner in the dollar yen. This pair has been good to me this year, and my fundamental bias has proven spot-on over the last few months. Despite aggressive monetary policy easing and fiscal stimulus initiated by Japanese Prime Minister Shinzo Abe over the last couple of years, the Japanese economy has failed to recover from its two decade-long stagnation. An April sales tax rate hike effectively flat-lined consumer spending, and data out of Japan released recently revealed that the nation was in recession. I’ve held a bullish bias in the USDJPY since March, and have been looking for any excuse to enter long in line with this bias.
One such opportunity presented itself on November 27, with a bullish pin giving me the excuse I needed. I entered at the day’s close just shy of 117.70, with target of 119 flat. Less than 72 hours later, action took out my target for a profit of just over 130 pips. As a quick aside, my bias in this pair remains bullish as we close out the year and I expect this to be the case for at least the entire first quarter of 2015. So there we go. Two winners and two losers in what has been an up and down period for global forex markets. As the fed is tasked with unwinding QE, expect more volatility as we head into a fresh year. Happy trading!