Why Trade? To make money of course, but there's more to it and what it boils down to is the traders mental outlook. There is nothing like the feeling of trading markets that have a vital need for global commerce. Not only is there a profit seeking element in trading the financial markets but there is also “the invisible hand”, as Adam Smith puts it, that helps to serve mankind – establishing prices that the world uses to conduct business. Traders are basically the weight and measure for what the real value of any tradable instrument is.
They say the market is efficient and rational so it’s not possible for a trader to make money, but it can be argued that not all participants are rational – such as the gambler who has a secret desire to lose as Humphrey Neal, the noted psychologist, wrote. Additionally, not all participants motives are profit seeking such as a Central Bank, whose mandate is usually to provide full employment and maintain a reasonable inflation rate – not to maximize profit. The trader always needs to be on the lookout for an opportunity that affords them low risk with the expected profit potential.
Below we provide you with a big picture on the outlook and insight of key markets that we have to offer. Knowing the big picture with a keen eye can help any form of trader because it helps to spot trends and possible reversals. It’s not just about capturing the small gyrations in any given market, but going with the trend and being there at the right time to take profits and reduce losses.
Currencies are open 24 hrs and provide ample opportunities for traders to profit from wherever they are located, on whatever time frame that is preferred. The main centers of finance are: Tokyo, London, and the United States. Below are the hours of trading for the major trading centers:
Currencies move on a wide variety of data, which is why economic releases are so widely followed and instantly move the market. For instance, look at the USD/CAD on a 5 minute chart:
On April 17, 2012 at 14:00 GMT, Rate Decision from the Bank of Canada meeting is released
This was just a short term chart of 5m. What would move the market over the course of years? Interest rates. Look at how the EUR/USD performed over the past 20 years.
The circled areas with arrows are times when US interest rates diverged from Germany and Europe. When looking at a chart of the combined German Deutsche Mark and European Euro to US Dollar (EUR/USD) we can see that these rates contributed to the movements in the underlying currency pair.
These are two examples on how currencies can be moved by the minute, hour, day, and month. Even certain technical indicators move the market and have nothing to do with fundamentals of the currency, like the conventional 50 day Moving Average. This is a most recent example of the EUR/USD from December 2011 to April 2012.
Look at how the 50 day Moving Average provided approximate support for the Euro in 1, 2, and 3. While the Moving Average acted as resistance for the Euro in number 4.
The two metals everyone has been watching are Gold and Silver. Will Gold finally sell off? Will Silver play catch up to Gold and outperform?
Gold, the barbaric relic, trades heavily because it’s a safe haven play against inflation. It is also an item that people flock to in times of uncertainty. It has been on a 10 year winning streak hitting its all time high last year. Will it make it to 11? The chart below shows an interesting cycle pattern of 14 and 28 quarters where a temporary pause or bottom occurs before the trend resumes. The quarter of September 30, 2013 should see an end of a 28 quarter cycle and a beginning of a new one.
Silver the more volatile (moves up and down in larger amounts) precious metal is also known as “poor man’s gold”. Silver tends to follow gold, though it does have an industrial demand aspect that gold does not have.
Is there a bubble in the precious metals? People talk a lot about bubbles, but when the market topped in the late 1970s the more speculative silver outperformed gold by a large margin, as shown in the chart below. Is this time different? Normally, a market bubble bursts when money goes into speculation which in the example below is silver:
Crude Oil is commonly referred to as “black gold” because it is the life blood that makes our modern economy move. Many countries that lack secure energy sources have been stockpiling the energy source, as well as recycling their depreciating US Dollar with a hard asset. Additionally, Mideast tension that we are encountering with Iran always helps to prop prices up since Iran controls the artery of Middle Eastern Oil – Straits of Hormuz. Throw in a new leader in North Korea and we most certainly are encountering uncertain times.
Looking at a long term chart of Oil, we can clearly see certain times that a trade may arise for a long term trader – 50% retracement levels and former multi-year highs. Note that Oil reversed from its market crash at the high of 1990 while the most recent sell-off ended at the 50% retracement of the entire move from 1999 to 2008. Before the rally gained traction, Oil was in a trading range that hovered around the 50% level, which would allow a trader to wait and observe the market before entering. Patience is a trader’s best friend!
Natural Gas is an energy source that is tougher to store long term than Crude Oil and can have very WILD swings in the marketplace due to low or high inventory and what season it is: summer or winter. The US, presently 2011-12, encountered a very long warm patch in the winter while reporting record surplus, as the new fracking technology allowed the US to potentially be a net exporter of natural gas. Note that before corn’s record percentage gain (400% move up), there was talk of record harvest and inventory glut, etc. What will cause natural gas prices to move up after such a big drop? Maybe a seasonal factor when summer ends. As shown below, there has been a pretty consistent pattern of when tops occur and bottoms form.
Commodities used to only be available to the future trader. Now it has become an instrument you trade in small lot sizes. Both corn and wheat are essential in global trade. Price movements tend to occur due to weather, harvest season, shortages (like what occurred in Russia), how many acres of corn or wheat will be planted, and ethanol use. Trading agriculture is a great way to participate in the rise of emerging markets as those populations will require more food as they expand.
That is what the farmers, grain processors and merchants believe as shown by the record high net commercial interest in the Commitment of Traders report. The Commitment of Traders report is a weekly summary required by US law to inform the public of the amount of interest by the three largest segments of the futures market: Commercials, Large Speculators, and Small Speculators. Logic would dictate that the Commercials know the most about the commodity and therefore prices should follow their lead. Is that correct with Wheat?
Below are notations of the Commercial Interests when they were positive on wheat. On the most part, wheat tended to rally. Please note, these are monthly charts and upmost patience is required. Presently, the Commercial interests are holding a record high amount of wheat. What should occur?
Looking at Corn can help us form an opinion of not only Corn, but Wheat as well. Below is a long term chart of Corn since the 1970s. The long term price high of Corn is 417 and a level that traders will aim for if weakness in Corn occurs. Can it?
Below the price chart, we present a spread of Corn to Wheat. It shows clearly the times when the ratio was over 1, a correction occurred in Corn and Wheat outperformed Corn (a possible hedge play?).
Will history repeat itself again?
From interest rates, book value, dividend yield, taxation, to economic growth of a country’s assets, to employment – stock indices represent a great avenue to trade based on the above trends. A Stock Indices does this by representing a basket of the largest and healthiest companies in that specified country.
We offer three from the United States since these indices represent different perspectives on the health of US corporations.
The Dow 30 is the oldest stock index in the world and represents 30 of the largest industrial companies. The SP500 is a larger basket of 500 of the largest companies from industrials, to utilities, to transportation companies. The Nasdaq represents the largest technology companies in the US and was the big winner in the market rally since 2009
While the general stock indices tend to move in the same direction, they move in differing percentages. The Nasdaq was the only index to make new highs. Look over the next two charts and see how critical the 50% retracement was. It’s a great area to participate in the next move the market has in store for the trader.
For Germany, we offer the DAX, which represents the world’s 4rd largest economy.
For France, we offer the CAC40, which represents the world’s 5th largest economy.
For United Kingdowm, we offer the FTSE 100, which represents the 6th largest economy in the world.
Note how much weaker France was compared to the UK and Germany. The CAC couldn’t break the 50% retracement level. Note, as well, how the European markets were weaker than their US counterparts though they tended to trend in the same general direction.