The Weakening USD ahead of the G7 meeting...

With respect to the corporate news coming out of Band of America which earnings fell short of expectations the US major indexes DJIA and NASDAQ were most in negative teritory and staged a late rally to close in a not very impressive manner:

Dow 13,888.96 - 3.58 (0.03%)
Nasdaq 2,799.31 + 6.64 (0.24%)
S&P 500 1,540.08 - 1.16 (0.08%)

However the markets are still holding above the psychologically important levels like 13 700 in DJIA and 1500 in S&P. Here is a Daily chart of S&P with extrapolated DJIA. Clearly is seen the turnaround signalled by the MACD cross to the downside along with the crossing down of the 20 day Moving Average which has provided Support from the September lows.

The real question however remains if the deteriorating strength in the US Dollar is leading or in other words supporting the stock markets performance. Given the severe consequences of the Sub-prime credit crisis has on Retail consumption and the Housing sector we can still see strength in the major Indices. That can be be directly attributed to the Fed rate cut which boosts corporate earnings while making the US exports more competitive through the weak US Dollar.

A fine example is the next chart which clearly illustrates the direct correlation between the US Dollar index (USDX represents the value of the US Dollar in terms of a basket of six major foreign currencies: Euro (57.6 %), Japanese Yen (13.6 %), UK Pound (11.9 %), Canadian Dollar (9.1 %), Swedish Krona (4.2%) and Swiss Franc (3.6 %) and the Dow Jones Industrial Average:

Direct relation to the weakening of the US Dollar of course is the recent record prices in Crude Oil - November contract is trading now at NYBOT above 88 USD per barrel. Consequently the Gold has reached a High of 769 USD per ounce in the NY Session.

The following daily chart shows that the Gold uptrend has been really steep and such a move definately can't be sustained with a pullback to the 720 area seen as imminent.

Certainly the bullishness is not gone with the Directional Movement indicator wide open and the ADX which measures the Strength of the trend well above 40 (ADX at 48.64). However this also can be used as a contrarian signal since the trend is at its High from the start of the year. Other technical point is the 20 day Moving Average that provided support around the 725 level is now at 742 and will exert a ceratain attraction to the spot price. Once broken it will put to risk the last support at 725 - and then the double peaks(Feb High & April High) around 708. The timing her however is essential as the momentum of the trend has not yet given a definitive sign of exhaustion.

Other elements of risk in the short term of course are the G& meeting this Friday and the comments from from Chinese central bank chief Zhou Xiaochuan indicating that more policy tightening will be needed to cool the overheating Chinese economy. Both events have exercised their effect on the overly popular theme of Carry trades (Borrowing in low interest rate currency like Japanese Yen or Swiss Franc and lending in High yielding currencies like the Australian or New Zelland Dollars).

The paring of carry trade positions in the start of the week however has not been so disruptive as the previous unwindings we witnessed in February and August. The EURJPY now at 165 is still looking to challenge the July all-time High at 169 and the recent correction can be seen as a healthy pullback with various technical indicators showing a high probabability of the uptrend to remain intact.

Other barometer of the Carry trades is the AUDJPY - boosted by the flight of the Gold price the Australlian Dollar as a commodity currency is strongly influenced by the Gold mining industry performance and the Spot Gold price respectively. Take a look at the Daily AUDJPY chart:

The July High around 107.70 is clearly in focus until we have a definitive pullback below thw 20 day Moving Average (The Green average on the price chart). However the steep uptrend is still intact as the recent pullback has is testing the Rising Support trendline that connects the August and September Lows (The Green diagonal line). Technically the DMI is bouncing off and this might soon signal uptrend renewal - especially if the MACD which is soaring and thus supporting the bullish scenario doesn't fall.

Logically the USD weakness is the focus until the G7 meeting. There is always a risk of specific comments regarding the exchange rates and that's why players hedge themselves by unwinding their positions prior to the meeting until they have a better view on the prospects of the carry theme. Previous G7 meetings have vaguely signalled the overall concerns over the slow appreciation of the Chinese Yuan and the global imbalances created by the extremely low interest rates maintained by the Bank of Japan (0.50%). The massive liquidity created by the BOJ has been used in the recent years to finance the Bull run in the US and European stock markets. Daily charts comparing the S&P500 and the USDJPY price show a clear correlation and this calls for a policy of a smooth tightening of te Yen liquidity because it poses a threat to the global financial system in case the majority of the big funds rush for the exit at one time.

Similar case to remember is the 'Russian default crisis' from the fall of 1998 when the USDJPY dived from a High at 147 to a low of 111.60 in 3 months. Back then we had exactly the similar credit crisis but also for the firs time we had the Long Tern Capital Management fund under the management of 2 Nobel prize winners go bust. Only the timely intervention of the Feb by easing the interest rates and the concerted buyout of the LTCM fund by a pool of the major investment banks saved the day.

Given the weakness of the US Dollar now we also have to keep an eye on the possibility of financial crisis that will start the 'Flight to quality' - exiting positions in the stock markets and buying US Treasuries. Such Liquidation markets might well return the US Dollar index back above the psychological 80 level.

Certainly the US Dollar weakness will remain the leading theme for some time but it is important always to be cautious because it is then when the last Dollar Bull has surrendered when the US Dollar uptrend will resume. Remember that once you have all the participants believing in a one-way market (or bet) then going against their positions is actually going in the most vulnerable direction and thus will produce the best trading results as the bid will be vurtually nonexistent.

Leverage - Key to FX trading

As we all know FX became so popular to the retail segment because of the leverage that gives the opportunity to trade currencies even with 100 USD.

What's the trick though? The thing is that leverage kills and people who invented the retail FX business knew it - thus there are so many retail platforms all over the place - this is a great way to make huge profits as 99% retail accounts get margined out in the first year..

This is not a true statistic measure since I don't have one but it is knowledge I have collected thorugh my experience in the FX market in the last 5 years (I started back in the Fall of 2002...). And yes - most books state that every 9 of 10 retail traders give up in the first year.

Why I am still in the market? This is a question I ask myself everyday. And some of the answers are that market is a pure extrapolation of human mind - a clear representation of the true self and I try to gethold of my own emotions and thoughts through mastering the trading practice...

And Leverage I think is one of the key elements... while in the beginning it was Technical and Fundamental analyses - now when most things are quite clear Leverage becomes the key to trading success as it measures the emotional bias and the level of GREED one puts into his trading.

See this as a vicious circle:
Greed makes you use higher leverage ->
Higher Leverage derails your emotional balance and inreases the FEAR factor ->
FEAR makes you think irrelevant and make wrong trading decisions ->
you kill your self (your account is margined out... in trading terms)

So I have set myself now to a test - trading 1 lot only - thus trying to implement some basic set of Money Management rules...

Market moves

Market doesn't move in straigh lines. Last 2 trades were exited for a modest gains - GBPJPY short with 45 pips and AUDUSD short -8 pips...

I wat to highlight the idea I got from the Interview with McKay in Market Wizards:

>>> Susccessful traders always trade a system that MATCHES their own PERSONALITY.

Buying event the best system doesn't guarantee you will be profitable. Only developing a system that matches your style and a trading style that matches the personality of the traders is Essential!

I believe my recent experinces and losses just amassed due to my attempts to duplicate other persons' systems. Well either it was not fully understanding the system on overleveraging on a given siganl that didn't go right or not taking profits and turning gainers into losers -- these are all terrible mistakes...

Yes certainly they are... but I beleive it is just a tiring lesson that I don't need somebody to tell me how to trade since I got enough evidence I have a right view already and my chart reading has improved in yhe recent months....

I think I just have to believe in my own analysis and trade with respect to my own personality type.

AUDUSD - 4H Short

Shorting AUDUSD here at 0.8924.

> The break down level is at 0.8915 - target for the 0.87 level where the major support lines comes at..

Confirmation of the signal comes from the DMI cross and the MACD cross from above - the confluence of thse indicators coupled with the price action failing from the recent Middle term high above 0.90 would suggest a pullback.

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What is obvious from Daily perspective -- trend has been quite parabolic and needs a rest - DMI hasn't exceeded the last expansion and looks back to contract and eventually cross in opposite direction thus signalling the upcoming breakdown.

Fibonacci measured targets:

1. 23.6% -- 0.8711

2. 38.2% -- 0.8513

These two are good enough. The MACD Historigram is moving towards the 0 line and the MACD signal has been trending for a nice period of time - which on the other side puts the odds of crossing the MACD Signal line from above much higher.

However calling tops is quite a risky trade as you would be better if waiting for a nice trend to get moving and catch the easy part of the trade... But on the other side we are speculating here and putting the money on a scenario / view based on my observations of the market dynamics.

GBPJPY - 4H Break down

Trading strategy here is to trade the breakdown of the 238.50/60 level where the rising Short-term trendline comes...

Good R/R ratio to challenge the Major Support trendline around 234.50... as a major target there...

We have the Directional Movement indicator to cross as a short signal confirmation and the MACD has bee for a long time hanging in the positive territoru and seems like dropping below Ceter line...

Sustainable Results

Sustainable results --- what is key to achieve Sustainable progress in the Long Term?

I believe there are several factors that affect our daily performance and also the long term outcome of our operations - no matter which sphere of human activity we are talking about:

1. Patience

2. Attention to detail

3. Intent / Effort

4. Visualise the successful outcome / Believe in your ability to succeed

5. Constant desire to improve the skills, knowledge and experience

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Then there is other thing that will always come into your way - this is the basic natural cycle. Life is not a straight line -- so are the markets as they are a basic representation of Human Emotions - Greed & Fear.

Once you have a big gain - one has to retreat and remain calm, not go for even more as the odds are starting to go against him. On the other hand - every loss improves the possibility that next trade willbe profitable...

However the Fundamental Truth that rules life, nature and markets is BALANCE.

One has always to seek balance. Meditation helps to get over the periods when things don't turn in your own direction --- but you need to calm the mind also when you are on the winning track cuz the excess in Emotions - either positive or negative will always ruin the Balance and thus will bring down the Long Term foundation of Sustainablility.

Basically it's not new and nothing really clever is written here - it is just a reminder of all the things I have been thinking and discovering time over time -- just a mark in time of what I beleive today and how I think things can be done better.

Everyday and every moment is a fight for balance -- one can never really rest on his prior success because life and nature (and markets as a pure representation of life cycles) move constantly... SO yo have to move with the flow. This calls for constant effort, intent and attention.

As Vladimir (my Taijiquan teacher) says our own body is flowing but our mind can't identify this flow (the body is a complex structure of atoms and molecules that are in constant movement). Even if are standing still we just don't have the proper ability, the subtle sensitivity to feel the movement inside - and also to be calm, unperturbed and still in the movement.

This is the TaiJi principle in its true representation: The opposites attract each other - everything has both opposites in its foundation.

We just have to improve ourselves and discern the natural cycle - act in accordance with the prevailing trend and never fight the flow.

Art of Trading

This concept is not new but I just add it here as a mark in time - so I can go back and rewind to where I was in the beginning once I get into trouble again.

We are talking FX speculation here, right?

Once we set the goal - speculation - it implies a certain positive outcome of the whole exercise, correct?

So since it is speculation, it also implies a great amount of risk - so the money on the table are not for basic needs so we can look at the Trading as an Art not just a means to raise cash...

This way you start trading for the purpose of making the best of your knowledge, skill and experience in the market. Just like Soros says: "You develop a scenario and test it in the market."

So once I'm in the market again we will approach the dealing in a more subtle way. Other thing Soros said was: "At the end only the Trend followers survive." I have been truly convinced you don't have to hang in the market for 14 - 16 hours to make a positive balance - you actually need:

1. A good setup / timing
2. Reasonable leverage
3. Patience to wait for the right conditions align so you have the best R/R ratio on your side.

Other thing Soros said: "You don't have to be in the market all the time - but when I come to the office I really do something."

This is certainly perephrased but the idea is that one or two trades a week can help you earn a living - all the other time you just need to monitor and wait for the right setup - no need to overtrade.

Range / Trend Fool...

This week has been one of the most terrible and intense experiences I even had....

No matter the bottom line facts... it was a time when so many mistakes were done, so much tension has been exerted and the fight was really fierce. Suffice it to say it was quite a terrific real-time educational course which now just pushes the trader's mentality transformation further even at a faster pace...

Every loss and gain; every time I got scared on a spike; every time I overleveraged and position size made me petrified - not able to make a sensible decision; every time I got faked out on a false breakout or got margined out trying to average out of a position I took against a major trend ---> well that's all the Old School of Hard Knocks...

I now beleive even far deeper that I don't need any magical other peoples' system. Nor that I can use a system developed by somebody cuz I just have to make my own set of rules designed by my own account size and risk profile... LoL..

Well, to cut the crap -- I have had enough evidence my market analysis is not worse thatn those of the analysts that appear on the Newsfeed -- their charts show exactly the same price as mine show and basically the reading of the chart is important and mine at the present point has got far closer to that of the professionals' point of view.

So what now is important is to focus on Money Management and Capital protection so we can build sustainable results.

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On technical side of the problem - let's focus now more on how to differentiate the Range / Trend market modes - here are some suggestions to dig deeper into:

1. Bollinger bands - measure of volatility.

2. Trading breakouts VS. averagin out.

3. Average True Range - how to use daily ranges to find if the market has potential for a move or the market is exhausted.

RULES

Rules are important for dealing with emotions.

As we stressed hard on the need to strip away Impatience and Anxiety this can be achived through a set of rules that will construct a certain framework - a psychological structure of rules to abide by.

Let's take a simple rule of trading only 1 to 3 lots per position.

Say you enter 3 lots - if it goes your way -> Take profit on first 1 lot at the first 20 pips / Set a SL on the remainder at Entry -> Take profit on the 2nd lot at the next 10 pips & leave the last lot to run its course.

I figure this way it will be much wiser than watching every minute the position and getting scared on every spike.

LEVERAGE is actually the Paramaount issue to deal with as it's actually the Measure of one's GREED/IMPATIENCE...

> Remember -> Rome was not built in 1 day!

Tight leverage rules will constrain you from large gains, BUT it will save you from blowing the account in 2 trades! At the end it's a game of Survival.... and it's not funny to feed them brokers all those years....

At the end it's a mind game since I figure it out quite clearly all those years I been blowing the account every time cuz I was Impatient and wanted to do it alright in 1 day... and if I had a greatday I thougth next will be just as great and possibly everyday a true holiday.

However you see everyday poses a challenge -- a true challenge for yourself and your mentality - it makes you face yourself and once you see you make mistakes one after the other you are quite clearly exposed to the HARD FACT of being unable to retain a sustainable pattern of following the Natural rythm of life.

Just tell me how many times a day one can seize himself into an obsessive thought bound with achiveing a certain goal or aquiring a certain subject of desire.... Thus it all makes you feel Impatient - you exert tension upon yourself.

A friend reminded me the Chinese proverb about Attainment:
"Slowly, Gradually and Naturally!"

Please take a good note of all these things and next time you load your accounts follow the rules and be patient!

Once you start Not wanting it will be open to success - only then when all HOPE is gone will the real process get started... It's the Daoist idea of Non-Doing in its most natural way cuz whethter its Trading or any other practice or part of life - there are Fundamental laws of Nature that rule and one have to abide by. That's the natural way and you can't change it nor fight it - Just follow it.

ANXIETY

Anxiety is not good. Sounds silly but it is a fact that must be dealy with.

Dealing with anxiety is dealing with yourself and your emotions. Anxiety is pushing you to the limit and once you feel on the edge it's all going wrong. Anxiety makes you impatient and brings forth the desire to make things fast, to achive what you think is necessary.

But in the end what is that important that it always makes you want more? Is it the GREED in you? Why you just can't have enough of what you already have? Why want more?

I believe that it will be only then when you actually want none that you will be able to value what you already have and things will start working cuz right now the pressure I exert on myself is making things very tense...

Once anxiety and impatience are lost and left behind then the calm will regain ground and the natural ruthm will be ruling over. One must not fight but go with the flow as it is the natural way of life.

IMPATIENCE

What do you think? Rome was built in One day?
No it was not! So what's the use in trying to build it one day or one hour?

So far there was no reason of doing it - but I felt pushing myself to the limit and thus exerting enormous pressure over myself. It all comes back crushing all the time, experience, money and knowledge I have invested I have beeen investing in my attempt to become a successful FX speculator.

Not that I didn't have spectacular wins - but more that I have been sustainably blowing my account due to overleveraging each and every time.

> Remember!!! Leverage is there to kill little retail account like yours! And it is the intrinsic trait of every human being of being both GREEDY and IMPATIENT!

So this is how brokerages profit from the 99% group (the retails that always get fooled and always chase the tail of it...). They give you 200 to 400% leverage then go shoot yourself.

Not that it's not fantastic! No, actually it's pretty nice going on a ride with a 100k position for 100-200 pips... but how often it happens? How often one can succeed to hold onto the winning position? And how many times one runs the losing positions for much longer or gets scared for 10 pips spike - just to see it going in your dircetion afterwards...

So how you go on from here?

Must be patient! And I got to formulate a certain set of rules to trade by from here on.

Just for the record let's say that on Last Friday I had one of my best trades ever - hanged in a 151 pip ride in GBPUSD on the break of 2.0325 to the high 2.04 - actually from 2.0229 to 2.0440 - with a 120k position - well pretty nice - then on Monday got a great short GBPJPY trade for like 80 pips with a perfect trade management -taking profit on half and then letting the other half to catch the whole move...

And the crash afterwards: Monday till today (Thursday) was arange market and I just blew the account to 0!

So you see - it just doesn't work like that!

Had a great gain - then had to lay low, take a break, lower leverage, trade less, wait for the right setup ---- what else?

Inretrospective I can see all the big mistakes. I made every possible mistake that could be made. So from now on I have all the knowledge, skills and experience to make this thing work.
Only thing is IMPATIENCE I have to fight with... Trading little gives no great profits but for the time being it can protect from losing big until the right setups come and until the rules start to kick in...

That's how it must work!

Market Modes

Market modes:
1. Trend
2. Consolidation / Range

Well, we know first that it depends on the timeframe, however we can easily discern those 2 modes in which market operates based on Hourlies.

Yes - one can easily look at the Daily chart for a direction - then watching the Hourly helps as a guide to what is the market really going to do. If Daily chart has a signal - one always needs the Hourly to precise the Entry and Exit strategy.

> TREND --- Remember! The market moves in TREND like 10-20 % of the time - and that's whenthe big moves materialize... then you have the other say 80% of the time for Accumulation / Distribution phaze.

> RANGE --- Remember! Once there was a big move the market will need time to digest and the new Accumulation/Distribution cycle begins - Big players unload their inventories on tops where retail accounts buy the Highs - - once there are no more buyers the market retraces 50% and you have another A/D cycle...

So basically range market takes most of the time since players need to make their minds - weak hands must give in and Big Players need to Accumulate/Distribute new inventory...

RANGE / Consolidation phaze can also be attributed as a Search & Destroy campaign for floor specialists, big Investment firms and especially Large Interbank players which have better info on stops and positions in the market and they try to gun the stops and always move in the direction that is most vulnerable...
E.g. if retail accounts are like 80% long the EURUSD - it is easy for Big players to move through the 99% crowd as this the direction of Least Resistance as most already are Long and there is no more cash to Support that campaign.

TREND / RANGE - Distinguishing the market Modus Operandi is not easy but Bollinger Bands which are designed to measure the Volatility can be of great use!

Some remarks from my Great Friend Oil Man:
> Most break happen on Friday as players square positons.
> Range days are mostly Monday and Thursday as Friday positons are in the process of Accumulation/Distribution.
> Wednesday to Friday are when most trends materialise - - also due to the carry interest swap points players long the High yielders against the YEN as Wednesday is a 3-day rollover.