AUDUSD FX SPOT - Possible pause in the downside as market hits key Fibo levels.

Amongst my musings about trading and market psychology I occasionally comment on some aspect of the market or a particular market. One of my favourites markets, which I have commented on a couple of times over the past couple of years, has been AUDUSD. My most recent comment was from the 6th Feb and was titled ‘Is the AUDUSD in the early stages of turning?’. 

I probably don’t need to elaborate on events of the past two months, unless of course you have been on holed-up in an Ashram half way up the Himalayas. – Whilst my big picture view still favours further correction on the AUDUSD, probably to somewhere in the low 80s at some point later this year or perhaps next, in the meantime, I feel that the market has done an awful lot of damage in a short space of time and may be close to exhausting the immediate downside: The market psychology is now very bearish; there are probably very few people currently long, and significantly the market has hit two key ‘Fibonacci’ correction levels in the past 24 hours. – The chart below highlights these major levels; 38% of the entire rally from the 2008 low, and a 62% correction of the rally from the 2010 low.

Buying AUDUSD now to go long would be a move only for the very brave, of which I do not count myself amongst. However shorts may wish to consider paring back on their position or taking profits around these levels, and those with a desire for a speculative longs may wish to see how the market fares around these levels over the next week or two. On the other hand, a clear and sustained break, on good volume, below these fibo levels, would suggest that I am wrong and that further downside lies ahead.

How did the Dollar get its name, how did it come to be adopted as the currency of the US, and why is denoted by the ‘$’ sign?

The word 'Dollar', is derived from the German word ‘Thaler’. The ‘Thaler’ was a silver coin minted in Bohemia and in use throughout Central Europe in the 16th Century. The word Thaler itself is a shortened form of the word ‘Joachimsthaler’, a coin from the city of Joachimsthal in Bohemia, which in German literally means ‘Joachim’s valley’ or ‘Joachim’s dale’, which is where the silver for the coin was mined from. Joachimsthal today is actually located in the Czech Republic, and is known by its Czech name of Jáchymov. The original ‘Joachimsthaler’ was depicted with an image of St Joachim, the Father of the Virgin Mary.

The ‘Joachimsthaler’ coin was a great success. It had been part of a revolution in
European coinage which had been occurring since the late 15th century; new higher standard coinage was replacing the dire state of the existing coinage of the mid to late 15th Century. – The state of Europe’s coinage had become extremely poor due to repeated debasement. This debasement had seen an erosion of the silver content of coinage to help finance the costs of virtually continual wars, and by the unremitting one-way transfer, over many centuries, of silver and gold to India, Indonesia and the Far East to pay for the importation of much sought after raw materials, spices and fine cloth. The continual debasement had seen the silver content in the dominant European coinage of the time drop to less than five per cent, making them worth far less than their perceived value. (Ok, I am sure many of you are thinking current US Dollar, but let us not get distracted from the story).

Following the success of the ‘Joachimsthaler’, similar coins started to be minted from other rich seams of silver elsewhere in various valleys in the region. Soon there were many such coins in circulation; collectively they became known as ‘Thalers’. With increasing circulation, the name ‘Thaler’ found its way into various other languages. Initially into Dutch, where it was known as ‘Daalder’ or ’Daler’, then into English where it was pronounced as ‘Dollar’.

How did its usage come to be accepted as a common in North America.During the latter 16th Century the ‘Republic of the Seven United Netherlands’ issued a coin known as a ‘Rijksdaalder’ (Dutch for ‘National Dollar’). This was issued during a period known as the ‘Dutch Revolt’ which was a successful uprising by Protestants in the Low Countries against the combined Catholic forces of Spain and the Holy Roman Empire. The coin featured a half-bust of ‘William the Silent’, who I suppose didn’t have much to say for himself, and was minted to the same standards as the Thalers which were common throughout the Holy Roman Empire.

The Dutch minted another coin known as a ‘Leeuwendaalder’, or ‘Lion Dollar’; it depicted a Lion, the emblem of the ‘Union of Utrecht’, the treaty which founded the ‘Republic of the Seven United Netherlands’.

This coin had a slightly lower silver content to the ‘Rijksdaalder’, and hence was of less cost to merchants, thus it was beneficial for Dutch merchants to pay foreign debts in ‘Leeuwendaalder’, rather than ‘Rijksdaalder’. With the Dutch prominent in overseas trade, the coin soon became a favoured coin for foreign trade, particularly in their colonial province on the East Coast of North America, which stretched from the Delmarva Peninsula (Delaware, Eastern Maryland and the south-eastern tip of Virginia) to the south-western tip of Cape Cod, with the provincial capital of New Amsterdam at the southern tip of Manhattan island. From there the Leeuwendaalder’s usage spread to the Thirteen British colonies on the Atlantic coast of North America, where it was known as the ‘Lion Dollar’.

The term ‘Dollar’ soon came to be applied to other similar large silver coins which were practically identical in weight and fineness to the ‘Leeuwendaalder’, or ‘Lion Dollar’. This extended to coins minted elsewhere in Europe and used in trade in the Caribbean and North America. This included the Spanish ‘Real de a ocho’, ‘Eight-real coin’ or ‘Pieces of eight’ (Peso de ocho) and hence the Spanish Peso, the world’s first global currency. (We are probably best familiar with the term ‘Pieces of Eight’ from ‘Pirates of the Caribbean’ and various other Pirate tales).

The Spanish Peso itself had become widely acceptable as one of the world’s major trading currencies; Spain had control of most of the world’s silver reserves following its conquest of Mexico, Peru and Bolivia. As a shortage of official British coins impacted the British North American colonies, itself leading to one of the many disputes between Britain and its North American colonies, so the Spanish peso (known in the British North American Colonies as the ‘Spanish Dollar’) began to circulate widely in North America. When the United States gained its independence, the new nation chose the "Dollar" as the name of its currency rather than keeping the British pound. This was formalised in 1792 when the United States chose the Dollar as the official American currency.

The US decided to opt for decimalisation whereby the Dollar was sub-divided into 100 cents (shortened version of the Latin ‘centum’ meaning a hundred). This was in preference to using the British system, whereby the pound was divided into 20 shillings and 20 shillings was divided into 12 pence, meaning 240 pence equalled a pound.– In this respect the US followed the lead of Russia who had been the first state to adopt decimalisation nearly a century earlier. (A system we in the UK did not stubbornly adopt until 1971).

Where did the ‘$’ sign come from?

Whilst the origins of the term ‘Dollar’ and its transformation to common usage in the US appear to follow a well laid-out path. The evolution of the $ sign itself is somewhat more uncertain. There are a number of competing theories, each of which are seemingly possible, though some with more credence than others.

The most likely is the theory that it comes from a handwritten 'ps', an abbreviation used in correspondence as a plural form of 'Peso'. Manuscripts from the late 18th and early 19th century show the ‘s’ gradually being written over the ‘p’, and the upward stroke of the ‘p’gaining dominance over the curved upper part. This eventually developed into something resembling the ‘$’ sign. (see below)

The 'ps' symbol first occurs in the 1770s, in manuscript documents of English-Americans who had business dealings with Spanish-Americans, and it starts to appear in print more commonly after 1800. - This does not however explain why sometimes the $ sign is drawn with 2 lines running through it. 

Other theories for the $ sign include:

• It is inspired by the mint mark on the Spanish ‘Pieces of Eight’ coin which became known as the Spanish Dollar. The coins were minted in Potosí in present day Bolivia. The mint mark was composed of the letters "PTSI" superimposed upon each other. The mark bears a strong resemblance to the single-stroke dollar sign (see photo right). 

• The $ sign is derived from the Number 8, whereby the Spanish Dollar was originally a ‘Piece of Eight’. The P of Peso and the 8 were said to be combined. The modification would have occurred to avoid confusion between the number and the signal. – This explanation would however seem implausible, as the confusion between a number and currency sign would have probably been too great. 

• The sign was inspired by the Spanish coat of arms engraved on the colonial silver coins which were in
  
  circulation in Spain's colonies in America and Asia. These coins, depicted the Pillars of Hercules a small "S"-shaped horizontal ribbon wrapped around each pillar. For the sake of simplicity, traders might have written signs that, instead of saying dollar or peso that may have evolved into a simple S with two vertical bars. – Highly speculative though plausible. (See picture on right)

• A dollar sign with two vertical lines could have started off as a monogram of 'US', used on money bags issued by the United States Mint. The letters U and S superimposed resemble the historical double-stroke dollar sign: the bottom of the 'U' disappears into the bottom curve of the 'S', leaving two vertical lines. Ayn Rand, the American libertarian philosopher, endorsed this theory in her novel Atlas Shrugged. However there is no documentary evidence for this theory though,. 

There it is then, the mighty US Dollar: Threatened as it is today by fears over its future purchasing power due to financing continual costly wars and the continual outflows to Asia and the Far-east. Yet it owes its name to a coinage which came into existence to replace a currency which had been heavily debased to pay for the need to finance costly wars and continual outflows to Asia and the Far-East. Who knows,perhaps the Bitcoin could become today's Joachimsthaler
‘Investment – Nest Egg’image courtesy of jscreationzs / FreeDigitalPhotos.net".

'Fear of Missing Out' (FOMO) in Trading and Investing.

‘Fear of Missing Out’ (FoMO) in trading and investment.

WHAT IS FoMO (Fear of Missing Out)?

FoMO is a label for an ‘irrational’ fear of – 'what a person will miss out-on’ or ‘regret’ if they fail to take a particular action, or are not present when particular events and opportunities occur. People will assume favourable outcomes, and will tend to significantly overweight short-term opportunities and the near or immediate future.  Emphasis is placed on goals and objectives not yet attained but that they want desperately to achieve.

The diagram below highlights how this typically takes shape inside our mind: 

 The Dangers of FoMO

‘The fear of missing out’ FoMO can lead to sub-optimal and less effective levels of performance, and in some cases can be seriously detrimental to a individual’s trading and career.: Often it results in creating the very situation the person is trying to avoid. As such it is considered a self-defeating behaviour, where the person or individual creates the very situation they are seeking to avoid.  

Whilst hunger for success and a competitive edge are considered as positive driving forces, when this is driven too much by FoMO this can become counterproductive to performance. Some typical affects of FoMO include:  

·         Traders feel overwhelmed and paralyzed by market, they will lack an ability to focus and orient themselves in a productive way.  In these cases traders may find themselves staring endlessly at screens, unable to tear themselves away for more than a few minutes. Typically poor, random and reckless trading with little rational thought for process may ensure. Or else the opposite may occur and traders are unable to commit to a market view or idea, always looking for other enticing possibilities with better risk/reward characteristics and perfect entry points.

·         Traders may confuse their presence in the market, with an ‘illusion of control’ over the market. Thus if they are away from the market or their screens, they feel they have less control over the market.  Many traders feel they have more control over the market than they really do, the effects of this has been highlighted in studies which have shown that the more control traders think they have over the market, the lower their level of actual performance.

·         An inability to exit trades: Traders fear the market will turn in their favour if they are in a losing trade, or they will fear it will move further in their favour if they take profit. - The real fear is that they will come to ‘regret’ this, and thus they avoid taking the necessary action.  – Thus people move stops or hold losers too long, or fail to take profits after strong gains, or soon after the market turns. – ‘Hope’ often will be the result, and ‘Hope’ is not a strategy. – It is a long-held wisdom within trading circles that one should always leave a little something on the table for the next person. This is an example where this particular wisdom would be sound advice.    

·         An inability to persevere for long with patience giving way to impatience. This can be seen in repeated poor ‘market-entry’ timing. - Whilst getting into the market (or exiting for that matter) is not an exact science, very poor ‘market-entry’ timing may occur with ‘too much frequency’.  – Traders may have a tendency to go ‘all-in’, or close to ‘all-in’, the moment the trade idea materialises in their mind. This is instead to taking a more considered and often more effective entry strategy. They may fail to allow for various risks or for the natural ebb and flow of the market, and may thus enter close to the high, up against a critical resistance or ahead of a major event with likely increased volatility.

·         A tendency for traders and investors to overload themselves, taking on too much work, taking on to many views and positions, running overly-complex portfolios, or taking on to many roles. Thus the person spreads themselves too thin, they want to be in all markets, all the time, and capture all opportunities. In these examples, their portfolio becomes too unwieldy, with too many moving parts, and when it breaks down it becomes impossible to unravel. – Often in these situations the individual will not commit themselves to actions which could be beneficial, since they fail to see what is happening, and feel that in taking the necessary actions, they will miss out on vital opportunities. Thus it becomes a negative feedback loop as they become trapped in an endless race and completely out of control.

The positive side of FoMO:

FOMO is not necessarily a bad thing. – It is often a sign of a hunger and thirst, and that can help people to drive themself forward. -  However, too often it is a sign that people feel they are catching up, or risk getting left behind. – It is far better to want to succeed as a primary goal or urge (A positive goal), rather than wanting to succeed for fear of being left behind in some way (A negative goal). –It is crucial that people find the balance where one should accept some ‘Missing out’ versus the ’Fear of Missing Out’.

‘Fear of Missing Out’, is an emotional reaction:

Whilst missing out is a physical inevitability, the ‘Fear of Missing Out’ is an ‘emotional reaction’ which results from the attitude of having multiple and often unclearly undefined options open to us. Most people have FoMO to some degree; however, it is when it becomes a strong negative driving force that it is a significant concern.

 

Steps to start helping to overcome ‘FoMO’:

FoMO is not always obvious, sometimes, even after an event, it is not always clear what drove a person to do something. However, if one notices themself becoming prone to FoMO, and if it has become a pattern of repetitive behaviours, then it is something that needs addressing:  The ability to cope well with FoMO correlates positively and significantly with financial success, social success and high levels of life satisfaction. – To start with addressing the ‘FoMO’ factor, one most overcome certain challenges, these include:

• Re-Framing Goals and Objectives. - In many cases the individual’s drive for success may not be their primary urge, rather their drive for success is being led by a need or desire to catch-up and not get left behind. Thus the goal is a negative goal and not a positive goal. (A positive goal = ‘I want to achieve this’, A negative goal = ‘I do not want this to happen’). Stating a goal as ‘I do not want something to happen’ is often a precursor to that very something happening. Goals should always be stated positively, this should be the case with ‘Long-Term Objectives’, ‘Short-Term Goals’, and ‘Steps’ (Mini goals: Perhaps even on a ‘trade-by-trade’ basis)
• Awareness: - It is possible that most people may be prone to FoMO, and this could affect them on many different levels. At the trading level (short-term and long-term), business strategy level and career level. It can also affect people outside of work in their savings and investments, as well as in social and family settings and relationships.  Awareness requires reflection; this could be self-reflection or feedback, or both. – However, our ability for true self-reflections is extremely limited, as is our ability to heed the lessons of feedback.  – It is therefore something which needs to be worked on.
• Prioritizing: - Developing an ability and skill to balance the various options, outcomes and desires within the limited amount of time and within the constraints of physical, emotional and mental energy and of finite financial resources. 
• Direction and Focus:  The individual attention must me directed fully in way helps them to achieve their goals, whilst remaining balanced and develops ‘peace of mind’. 
• Improve ability to multi-focus: - Learn to manage and function in a way that enables one not to become obsessed that they cannot give their attention to the role, at the expense of other parts of their job and their lives. Thus one is able to work in a complex environment, carry out the various activities with many disparate and disconnected parts whilst effectively and efficiently manage their focus, time and energy productively.  
• Perspectives: - Too often a loss of perspective inhibits affective performance. It is essential market participants are aware that:
• The market will continue to function well without them.
• People cannot and will not get in and out at the best levels. The market will move further and against you.
• That they cannot possibly be everywhere all the time and function effectively:
• People’s energy levels and mental abilities are finite.
• Their ability to act rationally at all times is limited and becomes more limited the more their mental energy is taxed.
• That there are a myriad other opportunities in the future, missing one or two will not be terminal, but continued underperformance could be.
• Coaching and Mentoring: - Effective coaching and mentoring with a qualified coach who has a solid understanding of the nature and background of the environment and markets is probably the most effective way to combat FOMO. – A coach will work with the individual on all the above areas over a period of weeks and months, providing a chance of the trader to reflect on his work, and working to help facilitate improvements in the way the individual works. – More importantly the coach will ensure the participant is fully engaged in the process and stays on course and committed to changing the way the work in order to be more productive.   

BGT Edge Ltd – Trader Performance Coaching and Mentoring: - At BGT Edge we provide high quality coaching and mentoring around the area of trader performance. – Our coaches are highly skilled, trained and experienced, and have worked with leading traders, portfolio managers, and hedge fund owners at some of the world’s leading investment banks and hedge funds in financial centres across the globe, making a real difference to bottom-line performance.   To know more please call us on +44 (0)775 344 6097 / +44 (0)207 993 5362 or email info@bgtedge.com, also check out our website at www.bgtedge.com.

Dennis Gartman’s ‘22 Rules of Trading’.

Following the dramatic turn in the markets over the last 24 hours. (Which included an over 7% decline in the Nikkei - After an 85% rally since October's low) - I am reminded of Dannis Gartman's Trading Rules - Rule Number 11 in particular rule number 11. Respect "outside reversals" after extended bull or bear runs. Reversal days on the charts signal the final exhaustion of the bullish or bearish forces that drove the market previously. Respect them, and respect even more "weekly" and "monthly," reversals.

 For those of you not familiar with the rules. - Here they are:

Dennis Gartman’s ‘22 Rules of Trading’. (As of Sept 2010*)

*The rules are periodically updated

1. Never, under any circumstance add to a losing position.... ever! Nothing more need be said; to do otherwise will eventually and absolutely lead to ruin!

2. Trade like a mercenary guerrilla. We must fight on the winning side and be willing to change sides readily when one side has gained the upper hand.

3. Capital comes in two varieties: Mental and that which is in your pocket or account. Of the two types of capital, the mental is the more important and expensive of the two. Holding to losing positions costs measurable sums of actual capital, but it costs immeasurable sums of mental capital.

4. The objective is not to buy low and sell high, but to buy high and to sell higher. We can never know what price is "low." Nor can we know what price is "high."

5. In bull markets we can only be long or neutral, and in bear markets we can only be short or neutral. That may seem self-evident; it is not, and it is a lesson learned too late by far too many.

6. "Markets can remain illogical longer than you or I can remain solvent," according to our good friend, Dr. A. Gary Shilling. Illogic often reigns and markets are enormously inefficient despite what the academics believe.

7. Sell markets that show the greatest weakness, and buy those that show the greatest strength. Metaphorically, when bearish, throw your rocks into the wettest paper sack, for they break most readily. In bull markets, we need to ride upon the strongest winds... they shall carry us higher than shall lesser ones.

8. Try to trade the first day of a gap, for gaps usually indicate violent new action. We have come to respect "gaps" in our nearly thirty years of watching markets; when they happen (especially in stocks) they are usually very important.

9. Trading runs in cycles: some good; most bad. Trade large and aggressively when trading well; trade small and modestly when trading poorly. In "good times," even errors are profitable; in "bad times" even the most well researched trades go awry. This is the nature of trading; accept it.

10. To trade successfully, think like a fundamentalist; trade like a technician. It is imperative that we understand the fundamentals driving a trade, but also that we understand the market's technical. When we do, then, and only then, can we or should we, trade.

11. Respect "outside reversals" after extended bull or bear runs. Reversal days on the charts signal the final exhaustion of the bullish or bearish forces that drove the market previously. Respect them, and respect even more "weekly" and "monthly," reversals.

12. Keep your technical systems simple. Complicated systems breed confusion; simplicity breeds elegance.

13. Respect and embrace the very normal 50-62% retracements that take prices back to major trends. If a trade is missed, wait patiently for the market to retrace. Far more often than not, retracements happen... just as we are about to give up hope that they shall not.

14. An understanding of mass psychology is often more important than an understanding of economics. Markets are driven by human beings making human errors and also making super-human insights.

15. Establish initial positions on strength in bull markets and on weakness in bear markets. The first "addition" should also be added on strength as the market shows the trend to be working. Henceforth, subsequent additions are to be added on retracements.

16. Bear markets are more violent than are bull markets and so also are their retracements.

17. Be patient with winning trades; be enormously impatient with losing trades. Remember it is quite possible to make large sums trading/investing if we are "right" only 30% of the time, as long as our losses are small and our profits are large.

18. The market is the sum total of the wisdom ... and the ignorance...of all of those who deal in it; and we dare not argue with the market's wisdom. If we learn nothing more than this we've learned much indeed.

19. Do more of that which is working and less of that which is not: If a market is strong, buy more; if a market is weak, sell more. New highs are to be bought; new lows sold.

20. The hard trade is the right trade: If it is easy to sell, don't; and if it is easy to buy, don't. Do the trade that is hard to do and that which the crowd finds objectionable. Peter Steidelmeyer taught us this twenty five years ago and it holds truer now than then.

21. There is never one cockroach! This is the "winning" new rule submitted by our friend, Tom Powell.

22. All rules are meant to be broken: The trick is knowing when... and how infrequently this rule may be invoked!

Is the AUDUSD in the early stages of turning UPDATE?

I posted an article in Feb questioning whether spot AUDUSD FX was in the early stages of turning lower, that article can be seen here . At the time Spot Aussie had just broken below 103.00 and was heading to the major support at 101.00, this was tested but the market held, and subsequently  rebounded to the top of the large sideways range which has been in place since the middle of last year. Last week however the market finally broke down through the 101.00 key support area. The upper 2 charts show the update of the 'Descending Triangle' type pattern which we highlighted back in Feb on the long-term charts, together with the weekly chart showing the breakdown. This would appear to be a significant move, occurring as it did on high volume (See lower chart) would appear to support the idea that this is part of a move which may have 'legs'.

Significantly there are fundamental elements which have been occurring which support the idea of a generally lower level for the AUD versus the USD. The past 2 months have seen a narrowing in the spread between Australian and US 2 year government bond yields by about 50 bps.  Last week's saw the Australian Central Bank cut rates by 25bp, and produce a report that growth is likely to disappoint going forward. - Further to this, general weakness in commodities in recent months, and the continuing story of slower growth in China, form a negative backdrop for the Aussie Dollar.

Where may all this be heading? 

The drop below 101.00 is seeing the market now flirting with the psychologically important 100.00 level. - If the market can sustain a general hold below 101.00 (I would not be surprised to see this level re-tested at some point), then I could see the market make an eventual attempt on the support area from 94.00 to 96.00. - My hunch would see even lower levels at some point, though a clear move through 94.00 would probably come after a bounce from that 94.00-96.00 support area.