Thoughts from the Trading Trenches
14 Years ago | November 01, 2013 12/2/23, 12:00 AM
In this issue:
- Fed Expectations Drive Global Trading – Look Ahead to November
- Trade Not to Lose and You Will Likely Lose
Fed Expectations Drive Global Trading – Look Ahead to November
By Jay Meisler
This month has seen a major shift in expectations over when the Fed might start to taper its bond purchases. The debate has been whether it would start in September or December. Now there seems to be a consensus that the earliest the Fed might start the taper process would be in March 2014 although latest talk has some pushing it out to April or even June.
This is a major shift in sentiment and resulted in a weaker dollar, rally in bonds (i.e. lower yields) and firmer equities. The reasons behind this change in expectations include the economic impact of the partial government shutdown and last minute kick the can deal to avoid a sovereign default, the shaky launch of Obamacare and concern over its impact on employment, prospects of another budget/debt ceiling battle in January and February and perhaps most important the nomination of Janet Yellen as the new Fed chairman.,
The reason I say most important is that Fed tapering expectations are driving global markets and Yellen is being viewed as an uber dove whose main focus is on boosting employment, In this regard, the nomination hearings on her appointment during the coming month are probably the most important factor for global markets going forwards. Attention will be on her testimony and whether she confirms or tempers the market view that she is very dovish. The latest talk is that the hearings will start on November 14.
In any case, it will be Fed tapering expectations that will guide global trading in the coming months. Any shift from the current consensus of a March taper would impact the risk mood and all asset classes. In this regard watch what Yellen says during her nomination hearings. The surprise would be if she comes across as less dovish than expected.
Addendum: The focus to start the month will be on the November 7 ECB meeting after recent data raised the risk of a response by the central bank to data released this past week. This saw the September euro zone unemployment rate increase to a fresh record high at 12.2% while October euro zone inflation dropped to its lowest level in nearly four years. The ECB mandate is price stability so the focus will be on any response to the inflation rate falling farther below its 2.0% target level. The risk of an ECB easing combined with a slightly less dovish FOMC statement saw the EURUSD tumble at month end as a market heavily positioned on the long side rolled over. Looking ahead, while the ECB has a history of disappointing market expectations but an easing risk is likely to keep the EUR on the defensive to start the month.
Trade Not to Lose and You Will Likely Lose
By Jay Meisler
There is a fine line between trading to win and trading not to lose. This is especially true in a leveraged trading environment where prudent money management is critical to capital preservation so you can stay in the game. I am a firm proponent of using stops for every trade but those trading not to lose may find where they place their stops makes it more likely they will lose.
Those trading not to lose more often than not seem to place stops based on how much they are willing to lose on a trade. An example is a trader that uses a 10 pip stop for every trade regardless of whether the stop has any meaning. In this case, the trade idea could be the right one but never gets the time to work. You can be right in your analysis but still get stopped.
This does not mean you cannot trade with tight stops but do so when the stop has a meaning. It also does not mean you should not have an idea how much you are willing to risk on a trade as that is how we establish risk/reward targets for our trades.
Those who have followed me over the years know I emphasize, when possible, to look for stops that have a meaning. This does not mean you have to risk more than you are willing to lose. It means you should look for stops that give your trades time to work and when triggered tell you that your idea was wrong and when they hold, tell you your trade has a chance of working. It also means you should adjust your leverage based on your stop to maintain the amount or percentage of capital you are willing to risk. For example, your standard leverage is X and you are willing to risk 2% of your capital per trade. If the stop with a meaning increases your risk to 4%, then cut your leverage in half to X/2 to maintain your 2% per trade risk.
To sum up:
- If you trade not to lose then you will likely wind up losing
- Always trade with a stop but try to find one that has a meaning
- Determine how much you are willing to lose per trade
- Determine your risk/reward target
- Adjust your leverage to maintain your risk per trade
- Trade to win, not just not to lose
Jay Meisler is the founder of the Global Traders Association, the advocate for the global trader and a co-founder of Global-View.com, the leading forex discussion site for more 16 years.
WARNING: FOREIGN EXCHANGE TRADING AND INVESTMENT IN DERIVATIVES CAN BE VERY SPECULATIVE AND MAY RESULT IN LOSSES AS WELL AS PROFITS. FOREIGN EXCHANGE ANDDERIVATIVES TRADING IS NOT SUITABLE FOR MANY MEMBERS OF THE PUBLIC AND ONLY RISK CAPITAL SHOULD BE APPLIED. THE WEBSITE DOES NOT TAKE INTO ACCOUNT SPECIAL INVESTMENT GOALS, THE FINANCIAL SITUATION OR SPECIFIC REQUIREMENTS OF INDIVIDUAL USERS. YOU SHOULD CAREFULLY CONSIDER YOUR FINANCIAL SITUATION AND CONSULT YOUR FINANCIAL ADVISORS AS TO THE SUITABILITY TO YOUR SITUATION PRIOR TO MAKING ANY INVESTMENT OR ENTERING INTO ANY TRANSACTIONS
