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#1
28th-January-2006, 15:07
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Question Regarding Interest Rates
Ok, I am new to the Forex market. I am trying to understand what really moves the Forex market. From my limited experience, it seems the markets don't move as much when there is little to no economic news, but then when certain news items come out, the Forex market seems to explode. I have listed a couple questions below. I appreciate any advice you are able to give. Please feel free to correct any of my questions, if you feel I'm asking the wrong question or could be asking a better question.
1.) If all things being equal, when a countries central bank actually comes out and raises interest rates after one of their meetings, does that usually strengthen or weaken that countries particular currency? I believe there is to be a U.S. Fed Reserve meeting this coming Tuesday, where they will decide wether or not to raise rates. I'm just trying to understand what impact those interest rate hikes have on the markets. It seems to me that increased interest rates is music to some peoples ears, and a spike through other peoples hearts. 2.) There seems to be a never ending stream of economic data. If you had to pick the top 3 - 5 economic news items that have the greatest impact on moving the Forex market, what would they be? starting with the most important. 3.) I have had some success with trading on the Forex market over the past month. I've read "Forex Made Easy" & "Bird Watching In Lion Country". I use the money management strategies in those 2 books. Most notably the multiple entry strategy. That particular strategy got me out of a couple jams this past week, and I ended up with a profit, instead of over reacting and taking a loss. So my question for you guys that trade full time is, what is your day like? How many hours a day do you trade? Do you constantly monitor the markets during all your waking hours? Is CNBC the only channel on your TV you use? How many hours a day do you guys work at this? I have a real desire to be a full time trader, so I'm trying to gain insight into how you experts structure your day, and what things you do during the course of a day/week that makes you successful? 4.) Finally, all the experts listed on these forums seems to be highly educated. Does the education you received equip you to be a successfull traders, or is it the actual experience of trading that does that? I ask that because I don't know if I would need additional college to help me be successful, or if it really just comes down to understanding some basic principles that would allow me to be successfull. Now, in addition to "Forex Made Easy" and "Bird Watching In Lion Country", are there any other books or referance material you guys recommend? Particulary ones that deal with the Forex Market. Thank you for your time! Craig 
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#2
29th-January-2006, 10:23
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Hi Craig
There is material for a whole book in answering your questions! On interest rates: The whole 'game' of forex is about finding a currency where your wealth can be parked without losing its value. This means that its purchasing power will not be eroded by inflation. So if you were an international investor you are looking for a currency that has the biggest gap between inflation and interest rates, the so-called 'real' interest rate. In most countries, that is a positive return. It has not always been the case and that is why central banks have tried (successfully) to 'tame' inflation, at least for the time being. But like everything, it depends on your time perspective on markets. So if a central bank is worried about inflation, they will raise interest rates. This will cause short term inflows to the currency, especially from those looking for 'carry trades', because they can benefit from a gap between a high yield currency and a low yield currency and at the same time have capital appreciation because the currency gets stronger. Extreme examples would be long Turkish lira or Brazilian real and short Japanese yen. However, inflation and subsequent high interest rates can have a negative effect on an economy if overdone. So it begs the question - do exchange rates affect inflation and therefore interest rates, or is it the other way round? So long term, an investor might not like the economic risk, despite high interest rates. Economic data: Yes, of course there is a never ending stream and these 'indicators' are supposed to tell you in which direction a country's economy is going - although they are actually giving you history lessons of where the economy has been! Although economic data is released by all OECD countries on a regular monthly basis, everyone watched the US. Why? It is by far the world's biggest economy. Non-farm payrolls has to be the most watched and seems to have the biggest effect if the numbers are out of line with the consensus. Other than that, I would say that CPI (inflation figures), The FOMC (where interest rate policy is manifested), trade balance and capital flows (although in the case of the US they are always 'bad') and the Purchasing Managers Index, which shows relative confidence by people in industry as to the future of the economy. Other countries may have a different emphasis: In Europe, because of the anti-inflationary stance of the European Central Bank, inflation indexes are very important. In a country like Japan, which manipulates the exchange rate for the benefit of its exporters, trade figures are paramount. Money Management is very important. I can only comment on my own proprietary system and say that I cannot imagine anyone having the faintest chance of making profits without it! How many hours to trade? Well, you are either in or your not. Professionals are watching the markets all the time, with a special pager that they can carry around with them. CNBC is better than anything else out there, but ultimately, you would need a Reuter terminal, which would cost you a fortune, but worth every penny. (A Bloomberg terminal is also a possibility). What do you do to be successful? mmmm....not enough space here and besides, telling people this is my living. Highly Educated? No formal qualifications with me, but 35 years in the business has been worth several degrees. Are quants with PhD s better traders? No, I don't think so, because if you haven't learnt how to handle the psychology of trading, no amount of theory will help you. Having said that, traders who can think in terms of probabilities have the best chance of being successful. I would say that being able to see the global economic picture will help you be a better forex trader, although you will find that you will be not doing that many forex trades. Also, to get your head around options will give you an entirely different vehicle to profit from forex trading. I don't want this to sound like a plug, but having a mentor is far better than trying to learn forex trading from books. Having said that, I recommend (apart from Dirk's excellent book, BWILC), "The Disciplined Trader-Developing Winning Attitudes" by Mark Douglas, "The Education of a Speculator" by Victor Niederhoffer and to ground yourself in technical analysis, "The Technical Analysis of the Financial Markets" by John J. Murphy.
__________________
Forex Trader Mentor
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#3
29th-January-2006, 14:47
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Thanks for responding Steve. Even with my limited Forex trading experience, I had already begun to suspect much of what you said was true. Here are some observations of mine:
1.) I couldn't imagine having open positions and then just going about my day, not paying attention to the markets. On days I have off through the week, I spend those days listening to CNBC ALL day. From like 7am - 5pm ET. And if I go out for a bit, I'm still listening to the news in the car and constantly checking my online broker via my cell phone. I feel I need to monitor any sudden moves, one way or the next. I'll even check the economic calender and get up in the middle of the night if there is important economic data coming out of Asia or Europe. Many times I've been able to capture a quick 20+ pips by doing that. 2.) For the most part I follow and thus trade the EUR/USD & USD/JPY currencies. I'm not 100% sure what a "Reuter Terminal" is, but I'm thinking its some kind of news source? I've been noticing something like what happened this past Friday during the New York session. At 1:30pm GMT the U.S. GDP #'s were released, and they were just horrible. Far below what was estimated. I noticed the second that info was released on CNBC, the USD began to weaken across the board like crazy. Then, a little later at 3pm GMT the U.S. New Housing data was released, and it was better than what was estimated. At that point the USD reversed course and began to strengthen across the board like crazy. Now, for about 20-30 secs before that info was released on CNBC, I began noticing the market beginning to go crazy. But I wasn't going to enter into any positions untill I heard what the numbers actually were from CNBC. Does this "Reuter Terminal" give traders the information before you hear it on CNBC? If so, how much faster would you get the news from a "Reuter Terminal" compared to waiting and hearing it from CNBC? 3.) From what the experts say, and my own observations, I agree you can't hang your hat on any one or two pieces of economic data. However, there is some data, like the ones you mentioned in your post, that if they fall outside of expectations, I notice the markets will act more "violently" than normal. You mentioned some other books in your post, are you aware if any of those books attempts to explain the relationships between the different economic indicators and the markets? 4.) I opened a demo account in early December. The online broker I use has $2,000 mini demo accounts, which I think is much more realistic than $50,000 demo accounts I've seen from some brokers. I did reasonably well with the demo account and opened a $3,000 live account in the beginning of January. I'm doing reasonably well with my live account but I'm constantly looking for more books/referance materials/help. You mentioned that "having a mentor is far better than trying to learn forex trading from books". How does one go about getting a "mentor"? I never went to college for economics nor worked for a investment company, so I don't "know anybody in the industry" that I could go to. In fact, when I listen to CNBC, I use it as much a learning tool as I do a source of information. But there are many times, things are said on the news, or on my brokers site, that I really have no idea what they are talking about. Acronyms and industry jargon is used, which I can kinda figure out using context clues, but I hate not knowing 100%. i.e. My online broker publishes a weekly economic calender for the upcoming week. I'm wondering to myself what CPI, FOMC, GDP etc mean. So I do online searches for what these report names are, what they mean, and try to figure out why I should care about the relevance of any given report. Having a mentor could be helpfull, but I don't know where to find one, or what would be involved. 5.) Regarding stops and stop/losses. It seems that during periods of little to no econmic news, the Forex market seems to move at random. Sure once a trend starts it may run a bit, but the trend could reverse course at any time, for no particular reason. I notice that many times the different currencies try very hard to reach a certain point, before reversing course. In these situations my online broker comments that the market is trying "run the stops". I'm not exactly sure why this happens or the exact relevance, but I notice it happens, all the time. Sometimes I get the sense the market is trying to be "spitefull" when attemtpting to run the stops. That is why I subscribe to Dirk's strategy of "cutting your gains, and letting your losses run". Using that strategy this past Firday earned me some nice profits. When the GDP #'s came out, I let the EUR/USD run up about 26-27 pips, than exited. Then when the U.S. New Housing Data came out a little later, I let the EUR/USD run back down about 25 pips, than exited. That certainly isn't a long term investment strategy, but it works in the very short term for me. Well thats about it, once again I appreciate your time and any addittional advice you are able to give. Craig
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#4
29th-January-2006, 15:21
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Quote:
__________________
Forex Trader Mentor
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#5
29th-January-2006, 15:43
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Quote:
A Reuter 3000 Xtra terminal is THE source for data on forex. Reuter is a news agency and every bank or broker trader in the world has this service. You won't find the price on the Internet, but here ( http://contracts.onecle.com/instinet...00.10.01.shtml ) you will find a sample of a price in 2000. At that point, the basic service was $1200 a month. They have some 318,000 terminals worldwide, so you can imagine the revenue! It has a price feed from most of the banks in the world, charts, and the best most reliable news service around - and this is what traders react on. Having said that, I like CNBC, but forex is in my opinion, poorly represented in the US (but I watch anyway - Maria Bartiromo is cute 8) ). CNBC Europe has much better forex coverage. Another good service for fundamental analysis is http://uk.informagm.com/gml/home.do, but this is also expensive. Great analysis, though!
__________________
Forex Trader Mentor
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#6
29th-January-2006, 15:55
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Quote:
 ). What we can do is lead a trader to consistent profitability.A mentor/trader relationship is very personal and requires that the chemistry is good. I like to work from a 'remedial' basis; that is, instruct, observe the trading results and correct. Others have a 'look over my shoulder' system. Some have a 'workshop' approach. It all depends what suits you best. If you wanted to be a pro golfer, you would need a pro coach. So it is with forex trading.
__________________
Forex Trader Mentor
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#7
29th-January-2006, 16:03
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Quote:
It seems you have come a certain distance, Craig and are learning the ropes. Like with others, I hope that you don't get wiped out before you learn the tricks and traps. Many do. The notion that you can learn to trade forex in a couple of days is so wrong. It takes years; Forex is simple but not easy. No matter how long you have been in the market, you learn something new every day.
__________________
Forex Trader Mentor
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#8
29th-January-2006, 18:16
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wow, once again thanks for all your feedback. You are right, I have zero chance of modifying the outcome of a position by constantly monitoring said position, once I have put a trade on.
The reason why I constantly monitor my trades is I don't want an opportunity to slip away. i.e. early last week I shorted the EUR/USD. Well, that was the wrong play. In last weeks opening Asian session, the EUR/USD ran WAY up the flag pole. So instead of panicking, overreacting and exiting the position for a loss, I subscribed to Dirk's strategy of multiple entry points with lower leverages, thus averaging my risk. I ended up with 5 entrys approx 40-50 pips apart on EUR/USD and holding the position untill Thursday. I almost started reducing a few of my positions, but then the EUR/USD reversed course, and came back down. Because of my averaged risk, I ended up with a nice profit by Thursday. So I am well aware of the fact I am not going to change a trades position by constantly monitoring it. And I have learned so much from CNBC. When I started listening back in December, I actually found myself starting to get a headache. The speed at which CNBC passes out data, jargon, charts, "expert interviews", etc can be a bit overwhelming to a newcomer such as myself. However I hung in there, kept listening, changed the channel for a bit if the headache got to bad, then turned back. Now, almost 2 months later I can listen to CNBC all day, and not get that headache. In fact now, I am paying attention to more of the markets "tone" than anything else. Sure there is specific, important data that for sure will move the forex market, but in general I'm listening for any major news items. i.e. has there been any international incidents that might disrupt things such as oil, is the U.S. markets generally up or down, things like that. In fact as far as stories go, CNBC seemed to be fixated on just a few stories last week, i.e. Davos, Disney buying Pixar, and Pfeizzer(whatever) and their inhalable insulin device. None of those items seemed to affect the Forex market. But all the positive earning reports late in the week, coupled with the New Housing data did seem to have a positive affect on the U.S. markets and the USD. I'll check into this mentoring you guys offer. Depending on whats involved, it may be in my best interest to get involved. Once again, thanks for all your input. Craig
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#9
31st-January-2006, 04:47
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Re: Question Regarding Interest Rates
Quote:
As a result the market discounts the interest rate adjustment and the effect is already priced in by the time of the release. Certain things however can't be discounted beforehand and that still have an effect if the market is surprised or have possibly misread some unofficial centralbanker talk or other "rumours". The FX market is one elaborate guessing game. To find any causal relationship between the interest rate announcement and immediate currency price action is wishful thinking. When the statement which usually come with the announcement indicates a change of any significance this may have an impact for the current and next two sessions (Say New York, Tokyo, London) especially on medium term traders that may have to adjust positions to account for new information. The professional market however doesn't live from episode to episode in isolation. Refer BWILC ... the soap opera story line. One swallow doesn't make a summer. Everything must be seen in context - then the factoring in of prices become clear and one is also protected from doing rash things on some of the announcements. (Like chasing the euro on a "bad" US GDP release last Friday.)
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#10
31st-January-2006, 17:14
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Re: Question Regarding Interest Rates
Quote:
Some think it means to have at least 2 if not 6 computer screens with currency price graphs of anything from Zim dollars to Euros splashed all over them with time intervals from per tick to per light year. For me trading is simply "keeping an eye on the market" and I do this now since 1998: You get up early (early bird cathces the worm). You figure in the most effective way possible out current prices, the value of your positions and if there is anything newsworthy in the market since last time you checked in. You also consider in a diligent and structured manner, what you planned or hoped or prayed for the day before, how it panned out inreality, what adjustments you may make, if what happen, what events (things like data releases) will hit the amrket, which of them may be worth noting / even watching (at least the reaction.) Then you make a plan for today. "if this happens I'll do this and if that happen I'll do that or I'm going to do this now (with respect to trades.) Then you continue with the rest of your life. In my case it is "managing my inbox and running DayForex, answering emails, take care of my mentoring and other things I do. Usually my CNBC (only CNBC) is on in the background mainly for the ticker, and here and there to listen to the wadda wadda of the talkingheads. I have 1 computer screen and have one trade-on-the-charts-platform running in the background with usually 2 currency charts open. (I however trade on another platform - just like these charts.) My main occupation is "Inbox Manager": Today I have received 85 emails and sent 50, excluding two bulk one's to my mentoring clients. I also had several Instant messenger and Skype chats with clients. I am going to stay alert for the Fed announcement and if things happen the way I would like it to happen I may even "trade". If I am lucky I may even take a profit, if not I may open a new position. Usually I would have knocked off by now for family time, but today the family will be late ... are there they are now :D You must make your trading fit your life not your life fit some trading scheme.
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