Making long term bets: Cable to $2

Sometimes I like to have absurd predictions.

I find that by looking at a long term chart, you can build a macro reasoning around a trade idea.

It doesn’t have to be right, but it has to have validity at least and you have to be open to changing your beliefs.

I think in the next few years, we will return to cheap holidays in the US, where £1 = $2.

Here’s a 6 month chart of cable.

Looks like a head is forming.

I’d argue that a mid term hold of 1.45 and you could hold GBP and keep adding to a very long term position.

This would put British firms who deal in USD in a tight position, since you’d really have to be hedging the dollar downside heavily, although that will be perfect for FX desks looking to make budget.

This could also be reliant on a Euro collapse.

I always note that fundamental moves have to be unwound, and you can see these in the charts.

Just like how the dollar move is currently being unwound (when the Fed stopped balance sheet increases, the dollar rallied through 2014), a failure of the Euro could mean that the EURGBP position is unwound – and that can also be seen in cable.

Take a look.

Cable

EURGBP

When I refer to Euro being introduced, I mean that in 2002, this is when it was introduced as legal tended to the initial 12 countries (banknotes and coins).

This has a vastly different usage to simply being currency, since it is now connected heavily to economic activity of consumers.

This is what has changed.

Back in 2002, no one knew what monetary union would bring (well, they did, but consumers and the EU didn’t).

They didn’t know that it would bring high amounts of unemployment, huge deficits, some nations benefiting more than others, countries requiring bailouts, 5% of loans in the Euro area being non performing, Deutsche Bank holding $75tn of gross exposure to derivatives and the ECB balance sheet being the highest in the world.

They didn’t expect cheap money being the only thing to be propping up large firms.

They didn’t expect a lot of these issues that have arisen.

Yet here we are with Draghi inflating the ECB balance sheet continually.

How is he going to unwind?

Well, he won’t be able to – not at the rates currently; who will be the buyer?

So he’s in a predicament.

This is the main reason as to why I do not think the Eurozone will last. There is inevitably going to be a liquidity crisis when it comes to wanting to get rid of these bonds.

Is China going to be the country to buy EZ bonds? Not with their epic debt issues.

I think confidence will be lost, gradually.

Even as recently as yesterday, the German ZEW Economic Survey had a huge miss, and EZ data hasn’t been fantastic this quarter.

The ECB, by trying to provide liquidity to the market, are actually creating a huge liquidity issue.

Back to the trade though.

The logic is pretty simple.

If we see the Eurozone start to fracture, accumulating longs above $1.45 would be a good idea. Even buy a Sterling ETF like FXB if you don’t want to be sitting managing it. See below:

I think a combination of high dollar funding costs, of which I referred to a few years ago here in relation to oil, Trump’s trade war with China and the Fed’s unwinding are going to keep the dollar suppressed for the foreseeable future.

On sterling side, I think Brexit is going to be a catalyst for growth.

With the service sector infrastructure we have, removing ourselves from EU regulations, especially in finance, should create a more competitive environment – everyone wants an FCA & PRU licence, very few care about being regulated by EU local regulatory bodies.

If the Euro were to go, it would mean that EU financial regulators would also go – because of the above reason, and London’s name as being the world’s biggest financial hub, I’d expect this to be hugely GBP bullish (no sarcastic comments about being a typical Leave voter, please).

There is no timeline for this, since that would mean I would have a crystal ball.

But any fracturing that is apparent will solidify this as a decent bet.

 

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Is the FTSE dead?

I’m concerned.

The below chart of the FTSE does not look healthy to me.

We are currently facing a lot of downside pressures, with the FTSE breaking below 7000 and pushing back up twice in the last few weeks.

This gradual probing is worrying and it’s not really being spoken about too much.

Let’s face it, we’re currently off the highs up at 7800 by 800 points. This has been a gradual grind down over the past few weeks.

Why? Well I have one main reason.

The Fed is unwinding their balance sheet.

We have to remember that a huge amount of the FTSE is denominated in USD, since many sales are done in the greenback.

This therefore has a direct correlation with Fed tightening monetary conditions – one component of that is shedding the huge $4.2tn balance sheet that they have acquired over the last 9 years through quantitative easing.

No more will firms be able to stay afloat by cheap credit.

No more will retail investors be able to hold as cheap margin positions on US equities, and more specifically, products such as $SPY, an ETF that tracks the SP500.

The former has a direct effect on the financial fundamentals of a firm.

If a firm’s price has been propped up for 9 years trough cheap credit, buybacks and corporate bond purchases by the central bank, and these are all of a sudden removed, investors will see this as a negative price effect.

This has a knock on effect on FTSE firms, not only purely from an investor standpoint, but the BoE tends to follow the Fed’s Mon Pol signalling.

The overarching mechanism here is something known as equity risk premium compression – there has barely been an attractive risk free rate for such a long time, that investors have been looking for yield as if they are jacked up on testosterone.

Here is a chart showing this.

What is hugely dangerous about this current market cycle is that only 9% of the price increase of the SP500 on the past bull market is due to earnings growth.

The majority of this cycle has been caused simply by low rates.

And now that rates are increasing, I see the most violent move to the downside that we have ever seen occurring when the Fed, and consequently the BoE, begin to really shed the assets off their books.

In fact, I believe that the Fed are only increasing rates to accommodate when another crisis hits.

It is easier in terms of economic confidence, to lower from $4tn to $2tn than to increase balance sheet holding to $5/6tn when the inevitable occurs.

I drew up the below chart a few months ago of the USD.

And this is the chart now.

The Fed has been hiking, which should mean a bullish dollar.

But the dollar has been falling.

For me, this signifies a lack of confidence in the US economy, where we are reversing the 2014 move I.e the end of the balance sheet increases.

I’m not advising to do anything, but if I look at the probabilities and where the easiest money will be, I’d be looking to get short on the FTSE (or long GBPUSD as an easier trade, although with that method you’re more susceptible to price shocks).

Why Warren Buffett is wrong

Please see alternative non clickbait title: ‘Why the media’s interpretation of Warren Buffett’s claim that ‘low cost index funds are better than actively managed funds’ is wrong… I wouldn’t get as many clicks that way though.

Yes, I am shameless.

That is quite a statement.

I do not claim to know more than Buffet, obviously.

But the way the media have taken a statement and run with it is ridiculous.

Take a look at this article for a recap.

Buffett made a bet with Protegé Partners that buying a low cost SP500 tracker ETF from 2007 til 2016 would return more than the fund of funds that Protegé bought.

I don’t actually believe that anyone would argue that long term, SP500 trackers are the best investment…

And the stakes that they were playing at in relation to their total managed capital was so small; they initially bet $320k which then you have to question their convictions over this.

But what financial journo’s have seemingly forgotten is the motivations for investing in both and the client types that use both vehicles.

Hedgefunds are totally different to passive trackers for many reasons.

The ‘hedge’ part of the word indicates some kind of risk management or risk aversion.

Hedgefund managers want their strategy to be as uncorrelated to traditional market benchmarks as possible.

In this way, they are able to provide more consistent returns with less drawdown than you may receive where you simply invest in an index.

The returns are more bond-like where it may not beat an index benchmark, but it beats an agreed benchmark set by the fund manager in the prospectus provided before an investor comes on board.

Do you not think that all hedgefund investors would be pulling their money out if they wanted to simply buy $SPY or chuck a load of cash at other passive index funds?

The dishonesty that many outlets push with this is crazy.

Sure, a low cost index tracker is fantastic for non accredited investors and possibly as part of a wider portfolio, but when you have $100m, you certainly do not want your cash following the herd.

What if a downturn occurred?

Would there be sufficient liquidity to pull $100m out of the market?

Many live off the interest – people with a lot of money aren’t exactly saving for retirement.

If you have $100m and you’re making 6% a year net of fees (underperforming the broader market) that’s $6m for doing nothing.

The financial media, once again, has ignored specifics of the three W’s – ‘who, what, why?’

Zero nuance.

But hey, pushing money towards Vanguard is always great right?

Why do brokers provide technical analysis?

 

hf

Honestly, have you ever looked at a piece of technical analysis that a broker has emailed to you?

Emails starting with ‘Technical Levels for 16/03/2018’.

Why do you send these things, but then promote in education that you should follow your own strategy and do your own research?

Oh, and why do brokers expect clients to follow their analysis when they’re probably trading against them?

It’s bizarre, but probably due to a little thing called SEO, something which I’m learning about in this blog.

In my view, market analysts are little more than content marketers.

And that’s absolutely OK.

Even at banks, analysts producing reports are just one cog in the commissions machine – investors want to feel secure in the notion that the people handling their cash know what they’re doing (although, if they just bought $SPY and held for 10 years, they’d probably earn more).

I guess that if a retail client from a brokerage receives something that looks good, there’s a subconscious feeling of security, even though total autonomy with execution is with them…

The broker is just there to collect fees.

At the end of the day, most revenue is derived from fees (example is from advising on M&A but you get the picture).

That ‘2 and 20’ structure, where a hedge fund takes 2% of AUM and 20% of any profit earned has worked well for many years.

The 2% has been explained to me as a manager’s bread and butter, while the 20% is just a bonus – I mean, it’s probably why Bill Ackerman isn’t crying his eyes out after losing out on Valeant and Herbalife.

Some investors have been questioning this model for a while now…

And Mr. Buffet’s famous bet would add fuel to their argument…

Back to the brokers…

It’s not a criticism of why they do it, but I just wonder whether it’s actually worth it in the end when they’re likely to collect the fee or profit off the B Book anyway, since the stats even out to 80:20 loss:win with any types of marketing strategies anyway.

 

 

 

Guestpost: Is the trend really your friend? From @EvreuxFX #fx #forex #btc #trading #oott

I’d like to thank Charlie hugely for writing this.

This is a really important article and actually has some connotations with the article that I recently wrote for him about heuristics and biases.

Give Charlie a follow on Twitter and visit his site for more expert info.


‘The trend is your friend’.

You’ve heard this before, haven’t you? You just need to start trend trading! Your broker, your guru, your moving average, Babypips, even your parents are telling you – just go with the trend!

Is it really that easy? Is this the forex trading holy grail?

We are going to find out.

This is the next installment of my series on trading clichés, diving deeper into the soundbite phrases we hear all too often. I’m very proud that David has allowed me to traverse the waters between DavidBelleFX.com and TradingProbability.com to write for him.

Which timeframe?

A natural problem of people announcing that the trend is your friend: which timeframe do you base this off of? Are you trend trading off of the timeframe above, below, or the same?

Look at this chart of GBPUSD for example, is it in an uptrend or downtrend?

I have outlined the three most obvious ways we could look at the trend. They’re completely conflicting. Long term we have an uptrend, medium term could be seen as a downtrend, short term is uptrend again.

Let’s look at a lower timeframe of the above chart:

We see more conflicting evidence. This chart says uptrend in medium term, the 4-hour chart was saying down in the medium term. This is yet another obstacle to trend trading.

For now, let’s stick to one timeframe.

How do you define a market trend?

Is it a purely visual thing? That doesn’t sound very robust.

Everyone can look at a chart and tell if it’s trending though, just look and see if it’s going up or down. Is the chart going from bottom left to top right? Uptrend.

I’m not as convinced.

Let’s use trendlines

They seem like a good idea.

Trendlines.

The clue is in the name, of course they can define a trend well. We’ll draw a trendline and that can tell us which direction to trade!

I’m being facetious, but this how some people think. There is absolutely no rhyme nor reason to how I drew those trendlines. I would wager that many trend traders do the same.

If you draw trendlines as a part of your strategy, do you have rules for them? 

Leave a comment below if you do, there is more than one way to skin a cat and we’re curious to know how other people do it.

One simple way would be to look at the structure of highs and lows in the market.

The swing high/low structure of markets

On this chart, I’ve highlighted the swing points which I perceive to be the most prominent.

Ignoring the first third of the chart, these were relatively easy to spot (the first third was pretty much a straight line move, admittedly a downfall of using swing structure).

If we go one step further and label these swing points, we get more clues about the context of the market. Let’s look at them contextually, compared to the previous high or low. We will label them as ‘higher’ or ‘lower’ than the previous high/low. Perhaps then we can get more insight into trend trading.

(Note that the first low and first high are single-lettered, as there is nothing to compare them to). Now that we have some market structure in place, we can potentially use this to define trends, perhaps even to help make trendlines rules-based.

It’s commonly thought of that an uptrend is defined by a market making both higher highs and high lows. We can see this in the most recent state of play. By these rules, the last 4 labels have defined us as currently being in an uptrend.

Let’s use this to draw our trendlines!

Now that we can define swings in the marketplace, we can use this to define trendlines. If we take our ‘base’ to be the first point in the new structure, we can connect swings to draw trendlines!

You may think: ‘that doesn’t look much like one of my trendlines’ – and you may be correct. But it is well-defined.

The ‘LL’ label is the base. The ‘HL’ led to a break of a prior swing point (the LH label) – the move which starts our definition of an uptrend. Every time we break to new highs we can move our trendline along the lows. This is one simple way to define both trendlines and an uptrend.

The trend is your friend, until the end, when it bends

Then there is this part.

What about when it bends? The start of a different trend, or a period of confusion and sideways action.

We can define this too. Remember how to draw those trendlines? Let’s have a look at a way to use those trendlines to define a change in market trend. If we rewind to the previous defined trend, we can get hints as to when a trend will change. These hints come as we make a breakout, through the trendline.

We were in a downtrend, and got early indications of a change in trend. Oftentimes, this is an important area to look for a retest and can often form an area to enter market, once this happens you could start trend trading to the upside. This particular breakout occurred in conjunction with my favoured horizontal support and resistance.

What makes a trend continue?

Without going too far into the dynamics of supply and demand in a trending market – an excess of demand, lack of supply, or both together, is what causes markets to move up.

We can see this for really sustained periods, such as the S&P500:

Clearly, the trend is up. I don’t even need to draw trendlines or high/low structure for you to know that. This is a trend that has been sustained over months and even years, due to the excess of demand (central banks mainly).

The trend is the path of least resistance though?

For a time, yes. You’d be a fool not to buy in that market. There is seemingly a magnet at the top of the screen.

However, this kind of sustained move cannot last forever. Supply and demand mechanics simply will not allow it. If demand has dried up, when supply (read: selling) finally comes into the market, there can be consequences (see: fat tails and skewness). Perhaps the best micro example is what we’ve seen over the last few weeks in the S&P500:

Trend traders: does this mean the riskier trade is trend trading to the upside or the reversal trade to the downside? The slow grind or the fast unwind?

Genuine question.

We have seen this time and time again. The vacuum below the people trend trading sucks them in, shattering days and weeks of gains in a fraction of the time. Although not quite as sustained a rally, let’s look at bitcoin:

The rapid unwind of the prevailing trend – it happens time and time again.

Wrapping up

Hopefully this article has inspired you to think more closely about forex trend trading. I hope I’ve helped to add some structural definition to trends and trendlines, as well as helping people to think more critically about the trend being a friend to you.

Don’t forget that the path of least resistance is only the path of least resistance for a time. Unwinds of long-term trends can be dangerous if you’re a sitting duck.

I just want to say a massive thanks to David for allowing me to contribute to his site – don’t forget to head over to TradingProbability.com for more from me!

$AUDJPY: Can an FX pair signify recession?

I wrote this last June:

Source

AUDJPY: Are We Heading For An Extended Period Of Risk Off Behavior?

Jun. 15, 2017 3:45 PM

Summary

• AUDJPY, if it hits the target I have outlined, signifies that we would likely be in recession.

• Japanese yields steepening putting downside pressure on the pair in the long run.

• China slowing down affects the Aussie hugely.

I use AUDJPY heavily to assess risk sentiment, since AUD is very sensitive to economic conditions surrounding production (more demand for iron ore, copper, etc., means higher GDP, construction indicators, overall happiness) while yen is bid during periods of uncertainty. I have been watching and waiting to see what price does around the ¥80-86 mark.

For me, the future looks quite bleak for the pair.

Take a look at the monthly chart below.

As I said in previous articles, I only consider head and shoulders patterns significant on the weekly and monthly – and looking at the technical context of the pair, this head and shoulders is hugely significant as it provides a target to past the price we have seen during recessionary periods.

Firstly, note the top blue rectangle. Price has tested and retested the financial crisis high and has fallen off pretty harshly. This supply has been consumed, and for me, this indicates that the upside of the overall structure is exhausted. From my experience, the probability of the support structure breaking and heading lower is very high.

Secondly, let’s consider this support structure (middle blue zone) at approximately ¥75.

We’ll look at this on the below candlestick chart.

The blue zone has been touched 5 times now with no price breakthrough.

The 2010 low of the range ¥71.91) is still very much intact. What is vital to understand here is that longer term traders are likely to still have stops under this support level.

The market is going to want to target these if we start to probe around ¥72-75. If the conditions would allow, then we could see a slip to ¥68-¥69 and an upside retest of that ¥70 level.

Now, speaking of conditions, Japan’s monetary policy has been relatively unwavering – there has been stability from the BoJ and in terms of being a risk off currency, this is hugely attractive to traders looking for safety or a long term position trade (the only problem with shorting this is that carry will be paid when holding a position overnight).

One aspect that you can add to being bearish AUDJPY is that the Japanese 10YY is pushing to above 0% again.

Chart from Bloomberg

The BoJ are also looking to steepen the long end of the yield curve in order to satisfy Japanese financial institutions.

It is also mentioned that the Japanese may pursue ‘stealth tapering’ so as not to affect the financial markets akin to the US in 2013.

This can provide certain confidence to traders being long yen vs. commodity backed currencies such as the Aussie.

Consider also the Chinese situation.

Below is Chinese GDP.

Chart from Trading Economics

Remember previously I said that the Aussie is heavily affected by productive demand? China is a huge importer of Aussie copper, gold and iron ore.

China is Australia’s best customer with $45bn being exported there annually. China is currently experiencing a slowdown and I do not believe the full effects are yet apparent, not just in the Aussie, but globally (Chinese credit bubble in the shadow banking sector has been named one of the biggest tail risks to the financial system).

If the Chinese slowdown proliferates, then I’d expect certain effects on the Aussie long term.

Note the first chart again. I think it’s important to note what occurs to AUDJPY during downturns.

I have noted 1 (early 90s recession), 2 (Asian crisis – yen bid in risk off environment) and 3 (financial crisis of 2008 – again, yen bid in risk off climate).

The head and shoulders target measure of taking the length of the neckline to head, and mirroring that from the neckline to the downside identifies that ¥50 is a potential target if the support at ¥70 breaks.

I’d be almost certain to argue that we would be in a recession if this were to occur if we examine history, and history, in the end, does repeat itself especially in the financial markets.

Image result for its happening gif

In FX, simplicity is best… #fx #btc #audjpy

K I S S

Keep It Simple Stupid

Probably what you hear about everything.

In trading, it’s genuinely hard to keep things simple.

First, you pick up bad habits.

Next, you try to create a fantastically amazingly filtered strategy with loads of different variables, because you’ve been told you should be able to measure your hypothesis, and science normally says to filter until you get a valid conclusion, right?

After that, you become frustrated and feel pain.

Emotions get the better of you and you lose your head.

You lose money…

Then you repeat the process when you’ve calmed down.

It’s a vicious circle.

The issue with many comes down to the lack of understanding of price and the interpretation of it, which transfers into the understanding of risk.

Slight tangent re: risk. I saw a tweet describing spotting valid risk parameters as being an executable entry with ‘positively asymmetric’ risk:reward.

I’d never heard it be described with that phrase but I like it.

Technical analysis only works when you can interpret price.

The best FX traders are able to understand that TA and FA alone are limiting in their nature.

There’s a reason why interbank dealers make money – they can see the market… and well, they are the market.

We have to interpret price as we see it on our trading platforms to have a best guess as to what these guys are doing (well that’s what I do anyway).

One way recently that I have further simplified my trading is to just look at Heikin Ashi candles (and I mentioned this in my ‘What I have learnt after 7 years of trading‘ article the other day).

This has made my life easy.

Previously, I’d have to determine where the valid zone is that I’d expect a bounce from and then place up to 10 orders across the whole zone.

Heikin Ashi has changed that… and I can’t believe that it’s taken 7 years to find this out.

This is how simple it’s made my strategy…

I ask myself, ‘where was the last supply before it broke the low? Where is the untested demand that broke a prior high?’

Then I place my orders.

Below is AUDJPY and I mentioned I was selling it here.

That’s how simple it is, or at least how simple I personally find it.

There are other nuances as to whether I want to take it or not (I’m not going to say them all), but that’s the barebones – and Heikin Ashi has made where I want to do business so obvious it’s scary.

Arguably, it’s irrelevant as to what your filter is, but I’d say find something that makes it as obvious as possible. I have found it after seven years… seven years of thinking a chart display was a broker’s trick…

As I said, you learn something new everyday, so thanks @ForexCobain

I am adding to my short AUDJPY position

I’ve been short AUDJPY for a fair while now since 86.80.

This was based on deteriorating Chinese conditions, which affect demand for Aussie commodities such as iron and copper, and the evident risk off situation we faced through January and February, and arguably are still facing.

For this trade I’m just looking at taking some cash and covering the rest of my position that I have running – this is pretty high probability in my view, so I’m confident about changing my stop loss criteria and upping risk to 3%.

Let’s see how this plays out.

Cryptos vs Small Cap Equities: the same, but different

I’ve asked myself two things recently.

1) Why the hell aren’t cryptos bullish again?

And

2) Why is the interest in cryptos when micro cap and small cap equities have been about for years?

Before I go further, I just want to put a disclaimer: I believe that cryptocurrencies and blockchain are going to be vitally important over the coming decades as we moved towards an even more digitised form of information and money transfer.

However, we have to overcome the primitive nature of the industry first – I believe that investors make their own luck through correct due diligence and own research, however, many of the crypto firms are just downright dodgy.

Notwithstanding Bitconnect, because that was just plain stupid and so easy to see that it was a Ponzi scheme, we’ve had a fair few ICOs popping up that have been fraudulent.

You tend to not have any fraudulent IPOs or equities listings where your money will be in effect, stolen. You might make a crap investment decision, but the company balance sheet, business plan, and overall health is available for all to see.

But this comes down to regulation – something that I am not sure that I or anyone wants.

The reason being is that, by doing your own research, you should come to a valid conclusion as to the business and investment risks. I don’t necessarily want a government department telling me what is good for me – if you’re stupid enough, for example, to join Bitconnect, then you deserve to lose your money (if you live in a country with adequate investment education).

For what reason would an investor choose to buy Dogecoin as an example? Are there any fundamentals behind it? Well, no, apart from ‘moon!’. On which planet is that a valid investment case? If you make money then fantastic, but someone else is always losing in this case, since there is no value being added.

And it’s the same for many others.

People seemingly go headfirst into a nice sounding white paper, where, if one were to approach a seed investor for regular backing, you’d get maybe 0.1% the total capital at that stage due to there being no actual product and the angel/VC not wanting the undue risks.

The AIM market for example can act like a mini crypto market, just with possibly lesser gains on average – but that’s simply due to the fact that the market isn’t on major steroids.

You can put forward the idea that there have been many crypto millionaires made, but they are in a small minority compared to the rest (and the amount of losers probably outnumber the winners, the losers just don’t tell you about it) – there are similarly many AIM investors who have made a lot of money through simply buying and holding a select few good companies, or even day trading (except with no leverage).

I just find it odd that a huge bull market in AIM and small/microcaps to the same extent as crypto hadn’t really occurred, but you could say that it’s really due to the differences in the assets… but I mean, buying ultra low on any asset and making 70-100% pretty quickly (as occurs on AIM relatively frequently) is nothing to be unhappy about… unless you compare it to crypto.

This I’d argue, comes down to the demographics of those involved in the two markets.

I reckon we’re going to see larger gains over the next year or two in cryptos. When Fintechs start pushing for them to become more mainstream and the payments use cases are made even more viable, this is when regulators will get involved though.

But the good aspect is the nature of the beast… it’s pretty hard to regulate post ICO stage, the same as fiat currency markets, which are OTC and largely unregulated, and for good reason too.

I am totally here for what the developments in blockchain and crypto tech can bring, but providing credibility through weeding out the fraudulent ICOs will benefit this 10-fold in my view, and this will be a huge contention over the next 2-5 years (and probably a lot of money involved if a private solution could be found for weeding out the crap with total impartiality – thinking caps on).