On Thursday, the European Central Bank will be delivering their first monetary policy announcement of 2010. In anticipation, the Euro has given up some of its earlier gains in anticipation of the central bank meeting. The ECB is not expected to alter interest rates but the market will be looking for any information on whether the central bank’s stance has changed given the recent fiscal problems of its members nations. Greece’s survivability is a sensitivity issue and any other central banker would probably avoid talking about the topic. However Trichet is not just any central banker and may instead take this opportunity to criticize member countries for not getting their fiscal house in order. Nonetheless, if Trichet even hints that fiscal problems play a role in their decisions on monetary policy, the euro could give up more gains.
The latest round of economic data provides little to persuade ECB officials to make definitive commitments on rates and exit strategies. The primary weak point remains rooted in the struggling employment markets. December saw the Euro-Zone’s unemployment rate reach 10.0% for the first time since the region was established. As a result, Retail Sales plunged -1.2 percent. However the increase in manufacturing and service sector PMI provide hope while higher energy prices have boosted inflationary pressures. Based upon the mixed economic reports alone, the ECB may not have enough sufficient reasons to be more hawkish:
Here is a look at how some of the key Euro-zone data have fared since the last monetary policy meeting:
Last month, the ECB took its first steps to scale back extraordinary measures. At that time, the ECB said “the governing council will gradually phase out, at the appropriate time, the extraordinary liquidity measures that are not needed to the same extent as in the past.” This included a definitive timeline of the end of March to end liquidity operations. Nevertheless, this move did not exactly signal any shift on the topic of rates, which were described as “appropriate” at the time of the meeting. This confirms a strict timetable regarding rates as we will probably not be privy to any new information until the second quarter.
Among the many issues that the ECB will grapple with tomorrow, the most important will be the circumstances surrounding Greece’s financial health. The whole situation with Greece has added a black stain to the European recovery. If in fact, the country is unable repay debts, the ECB will be looked to as the key to staving off an economic crisis. Even though any bailout has been ruled out by many EU officials, it is questionable if their rhetoric will be maintained if the worst case scenario comes to fruition. The ECB lends to Greek banks and many non-Greek Eurozone banks also have exposure to Greek debt. Therefore, Trichet could err on the side of caution tomorrow. It may be difficult for the central bank to start tightening if certain member nations are still deep within the clutches of recession. Therefore we don’t expect too much from the ECB tomorrow. Since they have already laid out initial plans for how they will deal with extraordinary policies and the uncertain environment leaves any hawkish comments about rates doubtful, the first ECB decision of 2010 may be an uneventful one.
The following chart illustrates how the EUR/USD has performed following the last 3 monetary policy meetings which are marked with arrow.
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By InTheMoneyStocks.com on January 13th, 2010 1:16pm Eastern Time
The SPY broke through a key trend line yesterday. Today it is retesting that level on this move up. Should be strong resistance in this area.
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The euro has climbed to a 3 week high against the U.S. dollar as foreign exchange traders continue to pile on risky assets. There are no top tier U.S. economic reports due for release this morning which suggests that it should be quiet trading ahead of the Beige Book report, barring any wild volatility in the stock market.
The disappointing non-farm payrolls number and trade balance report continue to have lingering effects on the U.S. dollar but the decline in volatility is contributing to the rally in the euro and other high yielding currencies. The VIX, which measures the volatility in the stock market fell to a 1.5 year low earlier this week and remains near that level. Low volatility fuels risk appetite and encourages traders to use cheap funding currencies like the dollar and the Yen to fund investments in high yielding currencies like the, euro and Australian dollars. Today's recovery in USD/JPY confirms that risk appetite has improved. As long as volatility remains low, the EUR/USD may make a run for its next level of resistance at 1.4675.
The following chart illustrates the relationship between the VIX and USD/EUR (inverted version of EUR/USD). As you can see, as volatility declines, the dollar declines against the Euro.
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USD-YIELDS CORRELATION: The correlation between the USD index and US-10 year yields pushes to +0.65, its highest since May 2009, recovering from a low of -0.85 in August. Although care must be paid in following these correlations, the recent rebound underpins our focus on yield differentials. 3.90% proves a vital obstacle to bond yields. Prolonged losses below 3.70% could result from reduced risk appetite/weak econ figures, so watch out from Thursdays retail sales and Friday's CPI from the US. But USDX remain comfortably supported above both of its 55 and 100 day moving averages--76.28 and 76.47 respectively. Were still bearish EURUSD aiming for a prelim target of $1.4430.
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Let's say you have made a detailed trading plan. You know the exact criteria or "rules" you will use to place a trade. You have a checklist to make sure you follow each of these rules. You have a money management strategy so you know how much you will risk on each trade, and you know what your risk:reward ratio must be. You know what time of day you will trade, what time frames you want to look at, and what currency pairs you want to look at. You have a spreadsheet ready to track each trade for further analysis.
The reality, is that this is the easy part. To give an analogy, there are many people who could learn an NFL offense. They could watch film, go to meetings, and learn which route each receiver will be running on each play. However, there are only a handful of people in the world who can execute these plays with a blitzing linebacker bearing down on them in a game situation. In other words, very few quarterbacks have the ability to execute.
Of course, the gap between learning plays and playing quarterback in the NFL is much larger than the gap between making a trading plan and following it. But the point remains that if we can't execute the plan, then it doesn't matter how great the plan is. It may seem easy to follow a trading plan, specifically if it incorporates all of the points I listed in the first paragraph. For those of you who have traded with real money, you know that this is not the case.
There are many obstacles that prevent most traders that have an excellent trading plan from following it properly. Almost all of these factors are psychological. The other factors are problems such as the internet going out right before a trade. Events like that are rare, and should be accounted for in the trading plan anyway. These psychological roadblocks can take a serious toll on trading performance. For those of you who have experience trading, I am sure you have had many moments where you wondered why you are not making as much money as you should be based on your trading plan. The answer, of course, is that you are human, and humans have emotions.
There are three primary mistakes that derail even the best trading plan. The first is taking a trade that is not part of the plan. The second is not taking a trade that is part of the plan. The third mistake is changing the rules of the trading plan based on a statistically insignificant event.
Taking a trade that is not part of the plan is extremely tempting. There are any number of reasons that a trader would take a trade that is not part of the plan. You could be having a losing streak and desperate for a win. You could be having a winning streak and think they are invincible. You could receive a tip that a large bank is buying Yen (keep in mind this tip could be from a bank trying to sell Yen and looking for suckers to buy their Yen). You could see something that was part of an old strategy they heard about. You could even straight up gamble just to get in the market. All of these scenarios are dangerous. If you lose, you feel miserable because you know you violated your rules and it cost you. That can lead to even more psychological damage. If you win the trade, that only encourages you to continue a behavior that will not be profitable in the long run.
Passing on a trade that is part of the plan is the second most common error. This happens for a variety of reasons. Maybe you have lost two and a row and are scared of taking another trade, only to see the trade you passed on become the big winner. Or you have won three in a row and think the streak can't last forever. Regardless of the cause, this is also very dangerous. It is not uncommon for an emotional trader to pass on a trade that fit their rules and ends up winning, only to place a trade that doesn't conform to their rules and ends up losing. These errors are why most traders do not maximize the results of their trading plan.
Changing your rules bases on a small sample size of trades might be the worst thing you can do. Let's say you have placed 300 trades with your current rules. Although you have had your ups and downs, this has been a profitable strategy. Then let's say you lose 5 trades in a row, which can happen. All of the sudden you change your time tested rules that have withstood hundreds of trades based on this sample size. Overreacting to a small sample of trades can lead you go down a dangerous path. If you change your rules to accommodate those 5 losers, you may wind up losing far more than if you stayed on course. Naturally, it is wise to reevaluate your rules from time to time. But do not make major changes based off of 5 trades.
Hopefully these examples will help you stay the course and follow your trading plan. If you have ever asked yourself why you are not as profitable as your plan indicated you should be, check to see if one of these stories applies. Better yet, learn from these examples and stay disciplined right from the start.
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By InTheMoneyStocks.com on January 12th, 2010 1:17pm Eastern Time
InTheMoneyStocks went from being positive on the markets for the first two days of 2010 (markets ended up) to neutral until Friday (market was flat) and then full out Bearish on the markets going into this week. They nailed it on every level! They saw many key signals that told of a major sell off in the works. They positioned themselves with shorts like FAZ, SRS, EDZ and QID along with calling shorts and tops on key stocks like Alcoa (AA), Potash (POT) and many others. These calls were all available to anyone who is a member of the Research Center. The market action today speaks for itself. Premium members of the Research Center or Intra Day Stock Chat are enjoying a major profit day again. Join now and enjoy being on the right side of the market!
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