Category Archives: analysis

10.14.18
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Why is Trump about to have a huge headache?

During the Great Leap Forward in Mao’s China, there was a plan introduced in order to kill four different pests (aptly and creatively called ‘The Four Pests Campaign’).

These four pests were rats, sparrows, mosquitoes and flies; they were to be eradicated to prevent the spread of disease and to stop the destroying of crops.

This was a huge failure.

Documentation shows that this was one of the largest reasons as to why the Great Famine occurred since the extermination of sparrows led to locusts massively increasing in population size as the food chain was disrupted.

This led to locusts destroying crops on a scale larger than the sparrows affected stored supplies of grains, corn and other soft agricultural food items.

The connotation here is a bit crude, I must admit, but one that has some pertinence: potentially well meaning policy to protect people can go entirely the wrong way.

QZ released an article on Friday explaining that Trump’s trade policy has had wildly the opposite effect of what the US president has expected it to have, with China hitting a record $34bn trade surplus with the US this month.

I’m not sure how well this will go down in Washington, with this being one of Trump’s leading policies – that is, if the policy was to less China’s surplus rather than affect demand for Chinese goods to the rest of the world. If the latter is the case, then the policy is actually going rather well since RoW Chinese exports have decreased while US exports have increased by a fair whack.

The quote from the article above speaks about there being a headwind to the Chinese economy – the slowdown in Chinese credit growth.

This may be the case, but I do not think that there is anything for the Chinese government to worry about just yet.

Take a look at the below chart.

This shows the 3M Shanghai Interbank Offered Rate. It’s the equivalent of LIBOR although less used on the international stage as a tool of pricing of some assets.

Something to notice is that China has been easing pretty stealthily since the start of 2018; this was when Trump put his first tariff on Chinese solar panel imports.

PBoC easing was absolutely a direct response to this.

You can see this from the USDCNH relationship too.

A cheaper Yuan pretty much counters Trump’s policy on Chinese trade since goods become relatively cheaper… the party is likely to be short lived for the PBoC though.

Something key that has always popped up is how China has been holding US treasuries for a long time and has dumped some…

But that is irrelevant in a world were the Fed are so adamantly shedding their own holdings of the US government’s debt, which is the main reason as to why yields have spiked and emerging markets have been under the cosh. It’s also relatively a pointless remark to make since if China dump them all then they have 0 leverage at all.

You only have to look at the positioning of traders on US treasuries to see that Fed rate rises are the reason as to why everyone and not just China have sat on the offer of US treasuries through 2018.

Late October 2017 is when we saw the temporary net long position (green line) start to turn long term net short.

This coincided with the Fed beginning their aggressive balance sheet shedding policy, and the USD liquidity issues that we see now.

The pertinence of this can be shown below.

That is 3m USD LIBOR. The upticks (monetary tightening) actually began in 2015 with the end of QE, but the effects on the dollar began later when the rate hike cycle began and increased in velocity when the Fed started to allow their bonds to mature. Naturally, this leads to the current uptick in yields – something which has affected the EMs hugely since they are laden with cheap USD denominated debt through the QE years.

Remember, LIBOR shows the cost of lending between each other and therefore, LIBOR can be a proxy for global liquidity and the corresponding creditworthiness of the interbank market (SOFR is too new a contract for me to have any thoughts on yet).

But back to China.

The LIBOR/SHIBOR spread is increasing, and this ultimately means that with the geo-politicking that is currently occurring we are likely going to face a tough reversal at some point where both parties find that they can no longer withstand the policies going either way (easing vs tightening). By then, Trump’s trade policy will be thrown in the dirt and will not matter one bit.

I see China going first – they cannot survive 305% debt to GDP. It’s untenable.

But so is the situation with USD.

Mehul Daya, an analyst who I think is absolutely bang on with the USD fundamentals, of Nedbank in South Africa reckons that the USD is about to face a collapse once a real risk free rate of return comes back… that is when r > CPI. He refersto it as ‘the straw that will break the camel’s back’.

However, I see it being made up of two factors – the first being that USD funding issues makes hedging too costly so assets are hedged in other currencies (I do not know which ones as I am not that smart) and the second being the issue Mehul raised.

This will lead to decompression of risk assets and a massive repricing/rebalancing of portfolio risk. This in turn will mean a collapse in US yields and therefore the dollar, probably to levels seen when we began QE in 09.

So does Trump have a headache?

Yes, but the answer is much closer to home for him, and that is with the hawkishness of Jerome Powell.

As we know, last week Trump has a bit of a dig at Powell since he knows that Fed tightening is at odds with his China trade policy. I personally think that Trump knows the Fed has created this illusion of a strong economy.

Zombie companies have not gone under since their operational costs are kept low through cheap credit and low (but now rising) financial costs and so unemployment stays low… but so does investment.

This is a surefire reason as to why Trump is so averse to Fed hiking, and is (again in my view) the real reason why he may need something a bit stronger than paracetamol for the inevitable migraine he is going to face.

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05.01.18
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OK I’m A Dollar Bull Now…

Just seeing one chart has changed my bias on the dollar totally by allowing a confirmation of a few fundamental concepts.

I have to really thank CNBC’s Todd Gordon for this one.

I read his article and noticed that he is using a different USD gauge.

I generally look at the dollar index as a function of equal weights.

However, just by looking at a more-applicable-to-reality trade weighted dollar, it has generated new thoughts and perspective on my macroeconomic view, as well as currency risk view.

Take a look at the TW dollar…

We have indeed breached a 30 year trendline and have found some support here at just below 85.00.

I’m not saying that we are going to rally off from here into 110, since I think we are still due a dip down to 75, but my very long term view is now bullish.

This is supported by various different other background events.

Let’s look at the 10 year yield.

This is following the same path as the trade weighted dollar (naturally).

With the Fed unwinding, I think that a situation such as in 1994 will occur again.

Bonds sold off in 1994 and yields rallied by 46%.

If yields move to where I think they will, that would be a 75% move from current price.

Why are yields moving up? The Fed is shedding assets from their balance sheet after having undergone the fantastically functional QE programme of the last 9 years (sarcasm).

See below. I have added 3M USD LIBOR onto here as well.

fredgraph (1)

You can see that when the Fed underwent their QE programme, USD 3M LIBOR fell a huge amount. This meant that USD was very liquid and interbank borrowing costs were low. Basically, everything was nice and liquid.

Since the Fed has started hiking in late 2016, 3M USD LIBOR started pushing up. Markets knew that this was in preparation for the Fed to start their great unwind. You can see this in the gradual decay in assets owned by the Fed (blue line) since 2016, with a slight acceleration in late 2017 when they announced fully that they will be shedding their ‘assets’.

But what does this mean for the dollar?

Well, a rising LIBOR should indicate dollar demand/supply constriction.

Take a look at this chart.

3M USD LIBOR is lagging spot USD by a large amount.

If we go back to our yield and dollar index charts, we can see that a broad upside move is not that crazy an idea if it holds that we are going to face a dollar funding problem. This dollar funding issue also leads to another problem and that is to do with liquidity.

We’ve already seen some flutters in the TEDRate, an indicator of liquidity risk.

When the Fed announced their unwinding, we saw a gradual rise in the Ted Rate which led to the highest level since 2009. Essentially, this priced in that liquidity risk was higher than the European debt crisis in 2012.

This indicator shows the credit worthiness of our biggest banks – LIBOR is the price that they lend to each other on the interbank market. A spike in the TEDRate means there is more ‘risk’ on the interbank loans market. That is not good.

The Bank Index has probably reflected this occurrence.

The drop off in price from the run up to the 2008 high could have some meaning in this case, especially since before the 2008 crisis we faced USD funding cost issues as well.

USD 3M LIBOR moved up pretty rapidly pre crisis then… it’s exhibiting the same characteristics now.

fredgraph (2)

Essentially, I feel the dollar is currently heavily under priced if we follow the underlying money market fundamentals. I think that there is some downside left and the current move is a short squeeze, but there will be a more broad based dollar upside move in the next year to 18 months, and much of it will be driven by dollar funding issues.

 

 

 

 

 

 

03.16.18
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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!

03.16.18
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$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

03.15.18
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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

03.14.18
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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.

02.14.17
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Is it better to rent or buy? The big question.

Image result for london house

This is a question that I have seen various times on social media. I’ll get to the point. My feeling is that buying is an idea that has been pushed heavily over the years by those who have bought their house for very cheap and who have seen it appreciate heavily. In addition, the majority of retail banks’ business is in the mortgage market where they glean interest through mortgage provision. You only have to look to the most recent financial crisis to see how far reaching the mortgage business is.

I wrote a recent article on London house pricing and why they have increased so heavily. A basic summary is that a combination of banks allowing less leverage & therefore a bigger initial deposit has increased rate of renting while low interest rate policy, quantitative easing and low housing stock has caused the price rise. This has caused people to rent more, yet it seems their real goal is to own a home. Why?

This article was taken from here.

Dear Emily,

I’m 30 years old, and my husband and I are thinking about buying a house. He’s all for it, but frankly, I’m terrified of the idea of taking on a mortgage. I know a number of people who lost their homes during the financial crisis. The housing market seems like it isn’t the sure thing everyone said it was. And we have significant student loan debt as it is. So my question is—is homeownership really all it’s cracked up to be? And what should young people do when they’re already swimming in debt as is?

Dear Renter:

I distinctly remember the time in 2006 when a relative told me I should “definitely” buy a house because “the housing market always goes up.” This was obviously not good advice, though it certainly reflects prevailing wisdom at the time. And I can see why in the wake of the housing crisis, you’d fear that the housing market always goes down. Which is also not true.

There is one unambiguous argument in favor of buying a house: Sometimes it is hard to rent the house you want. In most places, if you want to live in a single-family detached house, there are not many rental options, certainly not long-term ones. So you may find yourself coming up short on good rentals, and buying may be the only way to get what you want.

However, let’s assume that you are happily renting someplace and your only motivation to buy is financial. Is it cheaper to rent or buy? In equilibrium, the answer is: The price to rent or buy should be about the same. Why is that?

Imagine that rents were so high that you could buy a place and rent it out and still have loads of money left over—even after paying the mortgage, maintenance, and everything else. If that happens, the market will adjust. People will start coming in, buying properties, and renting them out. But as apartment-hunters have more options to choose from, rental prices will fall. And they’ll fall to the point where the rental price just about covers the cost of owning.

Alternatively, if rents were so low that owners would lose money renting houses, they’d stop doing it. But as the number of available rentals goes down, the prices will go up. And they’ll go up to the point where the rental price will cover the cost of owning.

This is an example of what economists call “equilibrium” and it means that ultimately, it will likely cost you about the same to rent or to buy.

You can also try to do this calculation directly. Think about what it costs you to rent. Then think about what it would cost to buy the same quality house. Take into account the mortgage, of course, but also insurance, maintenance, foregone interest on the down payment, and the value of your time spent fixing things that the landlord would fix in a rental. I suspect you’ll find that the costs are about the same.

Given this reality, the only other strong argument for buying a house is the view that the “housing market always goes up,” so when you sell, you’ll make money. But you don’t have to go very far back in history to see that isn’t true, so it’s probably not a great argument. The housing market also doesn’t always go down, so that’s not a great argument, either.

As to your debt question: Student debt may limit your ability to get a mortgage, but it shouldn’t keep you from buying a house if you want to. Your housing debt is collateralized by your house, so unless the value of your house goes down so much that you’re underwater on your mortgage, it’s not debt in the same sense that your student debt is.

A final note: Time horizon matters. There are a lot of fixed costs with buying a house: you pay the realtor, closing costs, etc. If you are going to own a house for 30 years, these do not matter much. But if you’re planning to sell in a few years, they significantly raise the effective buying price. And if you rent, so much the easier to flee the coming war with Australia.

There are various reasons why someone may want to buy a home as seen above. I am of the opinion that the initial outlay of a down payment could be better invested elsewhere. Note that any 20 year period of investing (and reinvesting dividends) in the SP500 has only led to a profit. See here:

If the rationale for buying is that you have an investment in the end then in my opinion, it holds up as pretty weak. If you add in the costs associated with being a mortgage borrower (interest payments, maintenance, insurance, renovation etc), would you be able to achieve a 246% return in a 20 year period? This is one huge opportunity cost, as well as being a very illiquid one.

I understand the above is great hindsight analysis, but the fact is that no one has ever lost money over a 20 year period while investing in the SP500 (as long as we are calculating purely from the principle investment, and with dividends reinvested). Many people have lost money on home ownership due to it being an illiquid asset.

Of course, you are able to release equity in your home to finance other investments, however this is not necessarily a given investment strategy in the future due to no knowledge of future house price appreciation or viability for remortgaging. And this brings me onto the next point.

Buying may be seen as more attractive, but what % of your income does your mortgage take up? Rent may be £1500 and a mortgage £1300, but would your emergency fund be able to cover mortgage payments if you lost your job? What if you’re utilising 60% of your income paying a mortgage plus home ownership costs? Renting provides a certain flexibility in an economic climate where the future is very uncertain. If you lose your job, you can quickly move to somewhere with lower payments, and avoid a very big mess.

At the end of the day, there are personal circumstances that come into it. But always bear in mind opportunity cost and longer term costs that may not be associated with renting.

‘I refuse to pay someone’s mortgage’

But you don’t mind giving banks interest payments? Interesting (ha).

Remember, mortgage in French means ‘death pledge’. Obviously death in this sense means until the loan obligation ends, but there are funny connotations with it as well.

A mortgage is classes as a liability until it’s paid off. A house is not an asset until that obligation is fulfilled. In addition, considering buying a home as an investment is poor, since house prices have barely outpaced inflation over the last 60 years. This does not make it a poor purchase, however.

The following video gives a roundup of what I have said:

Note, the mortgage calculation equation is wrong. It should be E = P×r×(1 + r)n/((1 + r)n – 1),  where E = monthly payment owed to the bank, P$ = loan amount, r = interest rate of loan, n = amount of months loan is for

 

Let me know your thoughts in the comments, on Twitter and below.

02.10.17
by

How to trade big moves – don’t, but do.

Study the following charts. These are the Referendum moves but work for extended and strong, thin moves as well due to the volume mechanics which I will explain at the end. The reason I say don’t but do, is because it’s best to trade the retrace.

cadjpy6thjuly

gbpchf6thjuly

gbpaud6thjulyeurusd6thjuly

Enter blindly on big moves that reject the 50% level. To plot the fib, you take the open of the candle at the start of the big move and end it at the wick of the end of the big move. You can use discretion if the move is close enough to the 50% level of the move (or if it breaks it and still rejects it). Optimum entry is a close exactly on the 50% level.

Stops are placed at the next fib level above if buying or below if selling (the 61.8% level or the 38.2% level).

Take profit is at the return to the range of the move, i.e the newly generated support level at the wick of the end of the big move. You can then use discretion to add to your position, or move stops to just above the first take profit level.

Why does this work?

gbchf6thjuly-NFP

Volume is key here. I shall explain in terms of the histogram (volume profile) on the side. Price ends up bouncing at areas of high volume as there are resting orders, people taking profits and new entrants into the market (trading at higher volume areas  is cheaper for big participants – less slippage due to there being more participants at these levels).  On the flip side, the 50% level almost always has a big void of low volume. Price can slip through this, but when there is very limited volume to trade into and when the trend is very strong in one way (made apparent by the big thin move), price tends to continue with the trend.

Here are the stats on the strategy taken on a daily & H4

time frame over 15 months:

The Sharpe Ratio could be better, but the strategy can be optimised further. The frequency of trades ranged between 1-4 per month.

Try it out and see how it works. It’s pretty simple which I quite like.

(Article originally written in August 2016).