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The character of the currency market consists of three interrelated  components: price, event, time. The person standing with the lion’s tail in his hand usually concentrates on only one or two of these basic facts, and excludes the third, or has a view of all three but doesn’t know  how to relate them. But it is the often complex interrelatedness of these components, and understanding them or not, which makes or breaks a trader. If a price has not changed significantly for a considerable amount of time, it is telling you something. If a price is changing significantly over a short period of time it is telling you something else. If an event (for example, a rate announcement) is a week away it will have a different affect on price than if the announcement is tomorrow. Markets discount the impact of events the closer they are. Relational analysis is the skill of listening to what the markets are telling you, and making money from what you hear. It is only one component of my system. I don’t trade information without a strategy (4x1) and a context and a comfort zone (median grid), but its a very important component. It’s what allows me to ‘tune’ my ear to the voice of the market, to get in really close. It is the passage that leads to the room in which the insiders are gathered.  

 
PRICE –EVENT-TIME (PET)

My PET subject. It relates to not only what is happening out there but in here, in my head. A price may be low, relative to recent prices, but for you it may be high since you bought at the wrong time and you are taking out-of-the-money pain. It’s an event taking place in your head but it is as important as an objective rate announcement. PET is about two sets of facts: those in the market and those in your head. All successful traders have their own version of PET. I just want to emphasise that mine, when dealing with events includes psychological events within the definition of events. It doesn’t matter whether they are ‘real’ in the sense that an interest rate hike is real, or in my head. They are all real if they affect or influence my trading. Time and time frames  differ depending on the size of your account and the price volatility. The Bank of Japan (BOJ) has, compared to your $10,000 account, an infinite time frame. The BOJ has deep pockets and a big war chest. Their motive is not profit in the same way you are profit orientated. The idea behind PET is to enable me to trade my time frame and reach my profit goals without ignoring what the big players are doing. So by relating PET (price, event, time) one to the other and all to the whole, I make better trading decisions. If you ignore PET interaction and simply trade with Technical Analysis (TA), you will be at a disadvantage from anyone using PET effectively.
For now I want to take a closer look at what I call real time information and how to use relational analysis. In Part 3, I gave you an exposition of how the 24-hour-global FX-day runs its course, starting in the east with Sydney and Tokyo and ending in the west with the close of the US markets. Let’s see what we can learn from this day.

He who thinks everything must be in bloom when the strawberries are in bloom doesn’t know anything about apples – Greek proverb

Most of us have a daily rhythm and if you don't plan to spend most of your time on currency trading, try to make only the smallest possible changes to your daily rhythm.  Make these changes to accommodate the dynamics of the currency markets. The centre of the currency universe is London, i.e. on average your best chance of significant moves are during London trading hours, in essence 08:00 CET (Central European time) 6 hours before EST (New York time) and about 16:00 CET. By far the greatest volumes of currency transactions go through London, the second-most through New York, and then Tokyo.  So whatever your current hours, this dynamic exists and plays an important role in currency price moves. The global financial markets 'close' when the NYSE closes, i.e. CET 22:00.  I have instructed Joe to spend time watching CNBC. After a week we had a discussion.  I asked him what he has learnt. He knows the name of the presenters, their time slots, he has noted the currency ticker in the bottom right hand corner of the screen. Joe is also suddenly bearish on the euro. This is interesting. Joe says a ‘big guy’ from a ‘big bank’ has called the euro down by 1,000 points before the end of the year. Joe’s worried. I ask Joe if he can remember this pundit’s name. Indeed says Joe, and when he tells me the name I pull up a monthly chart. I tell Joe that this self-same expert called the euro back to parity with the dollar after it had retraced from a high of 1.1850 to 1.0900 in 2003. Instead the euro stopped, turned, and is trading, at time of writing, at 1.2750. Joe did what most people do when they first watch ‘experts’ on TV. He believed them. They wear suits and they work for big companies  with impressive credentials. They sound convinced of what they are saying. Unfortunately they know as much as you and I do, and often less. They’ve got to say  something when interviewed and ‘I don’t really have an opinion at this stage’ will not get them invited back. But to verbalise to yourself that you do not have an opinion may be a very good trading decision at a given time. It’s no disgrace. On the contrary, it exhibits a sound understanding of the market. The point I want Joe to understand is that people who work for a salary, who get bonuses and company perks, live in a different world to you and me, the day trader. If the day trader is going to be cock sure, enamoured of himself, spouting certainties at the drop of a hat, he isn’t likely to have an extended trading career. He may however do well in television. Good traders keep to themselves just as they keep their heads down. They don’t boast or brag. They are cautious,  sceptical and rarely  venture opinions. That does not mean that I don’t listen to anyone or anything on TV. There are a few analysts I like, mainly because they take views and follow an approach I am comfortable with. Perhaps there is no inherent merit in my liking them since it may just be that you like what you are comfortable with and not because it  is in itself worth anything. Whatever, I mainly use CNBC to feed me the basic facts – and that takes some analysing, distinguishing the chaff from the corn.  I have suggested to Joe that he not listen to opinions but look at facts and then form his own opinions. From now on Joe is going to be working full time  developing a second nature, an information filtering system that allows through the big important pieces of relevant information and filters out the noise and irrelevant news. I’ve given Joe some clues as to what facts he needs to look at.  

 

That’s it for now. I’m going to give Joe some time to see if he can start relating these facts to each other. While he does so, it’s time for an intermission.
 
What distinguishes  winners and losers in a market  where information  plays such  a crucial role is, firstly what information they look at, and secondly what conclusions  they draw  from this information.  
 
If you really can’t live without indicators then use my Land-of-the-Rising-Sun-Follow-through-Indicator. Sorry, I don’t have a good name for it. But it works as well as any indictor and better than most, and  I guess my  tongue-in-cheek-title is to make the point that keen observation and sharp common sense can give  you your own ‘indicator’ and you can give it any name you wish. Here is how it works. Remember, there are  three distinct trading days in every 24-hour day. First the Japanese arrive at their desks, check the news, check the client order books, have morning meetings, read the analysts' research and start trading. (Tokyo is the third largest forex centre). Then they have lunch come back and start winding down for the day. Just as they shut down their computers the European markets, and an hour later London, come on line.  And shortly after they have returned from lunch the New York traders jump off the tube and settle behind their screens.

 

When I was studying exegesis (the critical explanation or interpretation of texts) I was developing a skill I never guessed would come in handy in the world of trading. Exegesis requires one to transport oneself into another time and place. What would it be like to be a Hellenistic Greek, a Corinthian trader, or a Roman consul? What did they think and feel, and why? This ability to put yourself in another person’s shoes is a most handy tool for a trader. I’ve practiced putting myself into the shoes of Japanese trader’s and institutions.  

So, the first part of the  trading day, while we are still fast asleep, takes place in the east, with Japan leading the pack in size and significance. What the Japanese trader is thinking, and why he is thinking what he is thinking, is important to me. Because when he shuts down, I go online, and, more importantly, London follows me an hour or so  later. So, I don my kimono and put on my Japanese thinking cap and try to figure out why the Japanese trader has done what he’s done. For example he has a long open  position in-the-money at the end of his day (my morning). So he asks himself, is London going to take the market up and fatten his position  further, or is London going to sell down and he better close his position. He is also thinking  to himself that when London wakes up they are  going to look back at how the East absorbed the news, read the market, and took positions. So when, over a period of time (several days), the Japanese trade the market up and come the end of their day the market is still up, i.e. they are bullish and because for a number of reasons they do not expect London to take it down, London tends to agree and a follow through ensues, pushing the market up. My daily briefing sessions to students and clients is in a sense nothing more than a value judgment on the Japanese position and what it may foretell for the day.

Think of the market as a very good chess player, a grandmaster. If you are an amateurish wood pusher with amateurish moves looking for fool’s mate and easy advantages, you are likely to lose the game. You need to be thinking a few moves ahead, anticipating counter-moves  and what your own reaction to these counter-moves is likely to be. What distinguishes winners and losers in a  market where information plays such  a crucial role, is firstly what information they look at and secondly what conclusions they draw from this information. Today,  with 24-hour channels dedicated exclusively to business,  the proliferation of newsletters, the Internet, chat rooms and guru get-togethers, the challenge is no longer where to find the information, but how to sift through it.  

 

Now remember there  is no consistent direct relationship between  say, the DOW closing price and early Asian currency moves, but if day after day  you note the figures, your subconscious will start picking up patterns and relations  your rational mind can't and wont. 

 
It’s called “gut feel”.  You will develop this over time by practicing. You can’t trade 24 hours a day. Get enough sleep and switch off so that you can start fresh. Information overload is  a real danger. It can make you unsure and unconfident  just as it  can make you  overconfident. It can also deafen your sceptical ear and rob you of independent thought. When everyone is saying the same thing I  start to worry especially if they all say the same as what I think. Don’t become a price watcher once you’ve taken a position. The price isn’t going to change because you are watching it. I would say there are two commentators that I quite like (both on CNBC). All that I mean by ‘like’ is that if they have a strong view, I will have to be pretty sure of myself to go against them. The first is, Ben Pedley (from Singapore) and Nick Hastings in London. Why do I like them? Let me be clear, they don’t call the market for me but they do give me the very short term 'buzz', especially Ben Pedley who is the bridge between Asian and European trading. I come away feeling I have the latest important news.  And that is what its about - I want the information; if I have the information I can put  it into practice myself. So I like them because unlike a  lot of other analysts they give me the facts uncluttered with their opinions.

The character of the currency market consists of three interrelated  components: price, event, time. The person standing with the lion’s tail in his hand usually concentrates on only one or two of these basic facts, and excludes the third, or has a view of all three but doesn’t know  how to relate them. But it is the often complex interrelatedness of these components, and understanding them or not, which makes or breaks a trader. If a price has not changed significantly for a considerable amount of time, it is telling you something. If a price is changing significantly over a short period of time it is telling you something else. If an event (for example, a rate announcement) is a week away it will have a different affect on price than if the announcement is tomorrow. Markets discount the impact of events the closer they are. Relational analysis is the skill of listening to what the markets are telling you, and making money from what you hear. It is only one component of my system. I don’t trade information without a strategy (4x1) and a context and a comfort zone (median grid), but its a very important component. It’s what allows me to ‘tune’ my ear to the voice of the market, to get in really close. It is the passage that leads to the room in which the insiders are gathered.  

 
PRICE –EVENT-TIME (PET)

My PET subject. It relates to not only what is happening out there but in here, in my head. A price may be low, relative to recent prices, but for you it may be high since you bought at the wrong time and you are taking out-of-the-money pain. It’s an event taking place in your head but it is as important as an objective rate announcement. PET is about two sets of facts: those in the market and those in your head. All successful traders have their own version of PET. I just want to emphasise that mine, when dealing with events includes psychological events within the definition of events. It doesn’t matter whether they are ‘real’ in the sense that an interest rate hike is real, or in my head. They are all real if they affect or influence my trading. Time and time frames  differ depending on the size of your account and the price volatility. The Bank of Japan (BOJ) has, compared to your $10,000 account, an infinite time frame. The BOJ has deep pockets and a big war chest. Their motive is not profit in the same way you are profit orientated. The idea behind PET is to enable me to trade my time frame and reach my profit goals without ignoring what the big players are doing. So by relating PET (price, event, time) one to the other and all to the whole, I make better trading decisions. If you ignore PET interaction and simply trade with Technical Analysis (TA), you will be at a disadvantage from anyone using PET effectively.

For now I want to take a closer look at what I call real time information and how to use relational analysis. In Part 3, I gave you an exposition of how the 24-hour-global FX-day runs its course, starting in the east with Sydney and Tokyo and ending in the west with the close of the US markets. Let’s see what we can learn from this day.

You know by now what moves currency prices.  It’s the big boys, the large funds, central banks, commercial banks and proprietary traders. Huge financial institutions do not decide, using TA only, where they invest millions or billions.  They decide it on fundamental factors - economic fundamentals. It’s very simple:  They want to make a good return relative to other returns for a specific time frame, three months, a year or many years.  They will shift millions or billions over international borders or between currencies,  and park the money in the places  they believe will give better returns. That’s it. This is what drives currency prices:

 

This was one of the tricks Joe was missing. I noticed a trade on his report that had gone against him, big. He had longed the euro, doing everything right. It was in Q2, his gearing was appropriate, he was trading  it in the direction of his long term view. Except that Joe entered the trade one hour before a very important announcement concerning interest rates. The announcement was euro negative and Joe, instead of waiting until after the announcement to enter a trade, was now out of the money.  

News is like a soap opera. It has a “flavour of the day” - Dick has just expressed his love for Dora - and a storyline, for example a dynasty in danger of being swamped by tragedy and internecine fighting, turns to its youngest member  who  must leave behind his callow youth and take up the mantle of responsibility in order to save the family legacy. The story line is the bedrock. It doesn’t change quickly or easily. Flirtations and new affairs are frequent. There are many flavours but only one story line. Dick’s love for Dora is a flavour, unless it goes to the heart of the story.  Learn to distinguish flavours from story lines. At the time of writing (beginning 2004) the story line is strong euro, weak dollar. The flavour may be a dollar positive event causing temporary weakness in the euro before it re-establishes the storyline.  In practice  this typically involves  announcements of figures (production, payroll, inflation) that represent flavours, but which may over time, if consistently pointing in one direction, start to alter the story line. Dicks’ love for Dora is starting to threaten the dynasty. Previously it was a side issue, considered by all to be a passing fling. An economy can basically be in one of two phases, an up-turn or a down-turn. The relevant fundamentals  differ vastly depending on the phase.  During a down-turn eyes are focused on signs of improvement. The down-turn or up-turn is the basic story line. We focus on the engine room of  the economy – IP (Industrial Production), job creation (less lay-offs), inflation, PPI (Production Price Index), CPI (Consumer Price Index), etc. These are the ‘flavours of the day’. During the first phase of the down turn one usually has dropping IP (Industrial Production), rising unemployment, and so on. After a while, and after interest rates have been lowered and other measures taken, the market starts to expect  improvement so they anxiously watch the IP and PPI growth (Production Price Index), employment reports, durable goods orders and consumer sentiment surveys. During an upswing the market is worried about 'overheating', so everyone watches 'inflation', CPI (Consumer Price Index) and PPI.  If PPI and CPI are above target or too high, interest rates will be increased to cool-off lending and accelerate contraction of money supply.

 

So now I’ve got Joe watching CNBC thinking ‘Days of our Lives.’ You’ve got to love trading. During my daily briefing session with  students I discuss and  analyse with them the story line, the flavour of the day, and how the two are interacting. We watch and closely monitor the soap opera. If a new character  appears on the scene we immediately ask ourselves how he might affect the balance of relationships. Joe’s got the story line down, now I want him to relate the flavour of the day to it.  

No data release stands isolated.  The most important economic data is the US data.  It must be  seen in  the context of other related releases and also the previous releases of  the same data.  The figures themselves are not that important, but the expectations of the figures are. So is the number of releases contra expectation. Say for example there is great expectation for a series of good figures and instead they all come out badly, the market will probably react viciously on the last release of the figures, because 'it all adds up'.

If one release is unexpectedly different from the rest it will usually cause a very short-term reaction because it is a new flavour rather than a change in storyline, but given the context, the market will wait and see what happens next month.  If the following month’s release confirms the unexpected shift of the  previous month, a larger reaction can be expected because punters may now be talking of a new story line rather than just a new flavour.  

The crux of analysing  economic data is  to work out to what degree  the market is focusing on it. Speculators take positions on the expectation that a release will support their position. If the release is contra their expectations a wild covering of positions ensues leading to short term volatility as some traders cover their wrong positions and others take profits on the covering (and their ‘right’ positions).  There is scientific data on this.  After any release with an unexpected outcome there is very high volume and excessive volatility for 15 minutes, more (than usual) volatility for 2 hours, and then everything is forgotten after another 2 hours and it’s back to normal. I very seldom trade announcements. They are  just too tricky, too many knee-jerk reactions and whip-lashes.

Let’s revisit the trader who does everything right but gets the wrong results. Why is that? He is reading everything right, but it just won’t work.  It’s the old void, the hole between what he is doing and reality. The problem is largely in his head. He is involved in ‘past time  analysis’ or ‘crystal ball analysis’  or ‘Stochastics analysis’ instead of a type of analysis that will reap dividends –  real time analysis  is one option.  

The theory of TA is that everything you need to know to predict future movements can be gleaned from past prices. I’ve never understood what that means. Over the last year for example (2003) I bought euros. TA was telling me sell, the price is overbought, real time analysis was telling me the opposite. The euro strengthened. I get better results looking at the present (real time) than at the past (TA).  But be careful, there is a lot of information. When I talk of real time information I mean  relevant  information. The trick is to take just what you need. Interestingly, though I believe psychology plays an important role in trading, the advocates of a sound psychological approach to trading tend  to neglect  info and particularly real time info. It is irrelevant whether the info or the event is out there or in my head.  It doesn’t matter. All that matters is whether it affects my trading. If it does, it’s an event and I take notice of it. If my wife is sick, it’s a real time event, if my goal has been achieved, it’s an event. If the  price is  low, but for me, given my situation, and all things being equal, is high, then it’s high.  Let me give you some practical examples. From 11th November 2003 to 11th January 2004, using no more than 2:1 gearing I returned just over 60% on my accounts. However, from 11th October to 11th November 2003, I  lost 20%.    

 

These were significant events that I had to  factor into my trading. When I was  losing I was thinking: my goals are receding in the distance, I am not reading the market, I’m losing, I’m wrong. Prices suddenly all seemed high. Any swing made my stomach lurch. In this mood a 1% profit or  loss on my portfolio was just that, 1%, but it’s internal cost was much higher. I was standing too close to the highway, there was too much noise and all I could see was a blur. By the time 11th January arrived the real time info in my head was different. The prices swung and it did not bother me, my goals were clear, I was less emotional.

I did the best thing I could do given my emotions and  state of mind. I stopped trading. It is easy to say you should trade unemotionally. I don’t think it’s possible. Everyone takes pain. To tell someone to trade without emotion is a fatuous piece of advice. But recognising that your feelings and personal events are events similar to rate announcements, for example, helps. Recognising that you are not in a state of mind to trade is a cultivated decision that can save you a lot of money. I had been longing euro since it reached parity with the dollar. I kept longing  it up to 1.1850. It went a little further (1.1933) and then made a big retracement to about 1.0750. I wasn’t sure of my long  term view anymore. I shorted the euro. I lost money. I realised I didn’t know what I was doing. So I did the best thing I could do given my emotions and state of mind. I stopped trading.  In June and August of 2003 I simply didn’t trade. It was tough at first, but it was the right decision. I got my perspective back and climbed on the euro revival wagon in September. I had some technical hitches with my trading platform recently. It was tiresome and very frustrating. I  squared all my positions until the problem was sorted out but  I was still giving my daily briefing to clients and  students even though I was not actively trading. When I read my calls now they seem especially lucid and accurate. Objectivity, distance, perspective – I
think it’s less a quest to turn yourself into  an ice man than to recognise your limitations and to act decisively when your emotions are affecting your trading.
Joe has been watching TV now for longer than can be good for anyone. He says he is not  sure  what he has heard or  learnt. Joe  is underestimating himself. Before  I asked him to watch CNBC, I had sent him a copy of one of my recent mentor chats and asked him to read it. He confessed that he could not make head or toe of it. He said it was English but that was about all he understood. Joe had not been primed. Now the same mentor  chat made a lot of sense because he understood terms, references, words, analogies. Joe’s ear had become attuned.

:DrForex > Just want to listen to man on telly  
:DrForex > BOJ no rate change  
:DrForex > BOJ sold 203 billion dollars yen to keep yen steady  
:DrForex > trade deficit today  
:DrForex > budget deficit 521 bln  
:DrForex > UK CPI today  
:DrForex > no fireworks expected  
:DrForex > there is a note about eurodollar contracts, yesterday a massive 312000 contract short dollar were closed  
:DrForex > the interesting thing is the shift to dollar long (shorts were closed)  
:DrForex > probably the reason why Asia today had no interest in euro or gbp  
:DrForex > Review:  
:DrForex > :DrForex > the risk is in that simple saying, if it should go up and it doesn't it ill surely come down  
:DrForex > :DrForex > one must just keep  that in mind and not unnecessary add positions willy nilly  
:DrForex > :DrForex > right at the highs just because time went by  
:DrForex > I had that in mind or later today  
:DrForex > GBP made a spike to 1.8650 and there was something to bank  
:DrForex > but euro went nowhere since Friday morning  
:DrForex > with big time retracements  
:DrForex > I think best will be to wait for the trade data today before considering to re-enter  
:DrForex > and altogether be more patient on further additional) nilly willy entries  
:DrForex > Russian banking crisis ...  
:DrForex > slashed capital reserve requirements in half ...  
:DrForex > that may cause some 'flight to dollars'??  
:DrForex > yen gave back 130 since yesterday morning  
:DrForex > I just think there were too many short term speculating dropping dollars  
:DrForex > and with central banks not joining the party the momentum ran out  
:DrForex > I’ll rather wait for further weakness this morning before acting  
:DrForex > Gold down in Asia to 403 (-3.5)  
:DrForex > oil flat @ 39  
:DrForex > DOW flat +25  
:DrForex > futures flat +5  
:DrForex > PLAN:  
:DrForex > with euro just 20 points above post jobs report support see it tested  
:DrForex > and gbp maybe to test 1.8500  
:DrForex > with support holding one can look at buying, but if it breaks  
:DrForex > and US figure is better than expected see another 100 points down  
:DrForex > which will then be a buying level I think  
:DrForex > but for the moment first look for the test of support as indicated  
:DrForex > eur around 1.23 piercing it down to the 1.2270  
:DrForex > i.e. the support LEVEL is that 1.2270 - 1.2320 post Jul 2  
:DrForex > I don’t think GBP will go back all the way to 1.8300 support, but you never know on a bad figure today  
:DrForex > market is still thin because of holidays also and GBP usually have an elaborate downside  
:DrForex > OK, that’s it, no one way good news  this morning  back to hard grafting, teeth gnashing, stomach churning, hand wringing, dip buying  
:DrForex > eur 1.2360; gbp 1.8560, jpy 108.60
 

Summary: Trading in the currency markets is more than having a strategy. It requires real time information  to make real time analysis in order to make a real time decision. You have to put this all together and it takes practice. Ninety percent of traders can’t, they want something cute, neat, simple. That’s why there are lots of losers and only a few winners. You have to take into account the interrelatedness of all financial markets, stock exchanges, futures prices, bond markets, oil market, gold market, and not just their individual prices.  Institutional and other large investors are active in all these markets.  For our daily purposes the most important market is the futures market. I check the futures index early morning and then later on when the CME (Chicago Mercantile Exchange) opens. This gives me an indication of the prevailing mood. Some traders look for meaningful correlations between the NYSE (DOW) and USD, but beyond a certain point, and that point is reached very quickly, they are wasting their time. What you can look for and find, with practice, is a feeling, a rhythm. The story line is fixed, until it changes when you least expect it. By watching each episode of the soap opera you will be in a better position to anticipate this change and react quickly to it. With time and experience you will get the feel for what is important, what may be a turning point, what is noise and what is meaning.
 
Real time analysis is necessarily a holistic approach. The traders who fail generally make the same mistake. They try to reduce trading to one  little aspect, for example the 'trigger' that makes them enter the trade. The eternal struggle to time their entries in the hope that they will never be out-of-the-money. One needs to have a holistic approach. Psychologically it is not easy, scientifically it is problematic (randomness, probability theory etc).  One needs an inner drive to beat the odds, beat the market, and beat yourself. It is not a simplistic exercise that can be mastered by learning a few tricks called 'technical analysis’ or ‘fundamental analysis’, or ‘trading psychology’. Nothing works in isolation in trading. Because the market is complex it requires  a large view.  Real time analysis does a job for me. It takes my 3% house advantage as if I were the casino and transforms it into a higher probability for trading success. It makes me the casino, not the punter. It relates disparate pieces of information and places them in lucid perspective so that I can make good trading decisions.

 

Source : BIRD WATCHING IN LION COUNTRY