A Lesson In Basic Market Function – July 31st 2015 Forex Commentary
It always amazed me when people are surprised that bubbles pop. I read a great article earlier today that summed up the Chinese equity market in a few facts. Retail investors make up 85% of the market. Let me drop some knowledge if your unaware…the average retail investor can barely wipe his/her backside. You combine that with a culture that has never been heavily invested in equities and you have a recipe for rape and pillage, medieval style. Essentially the Chinese market is the US stock market of the 20’s. When you combine irrational leverage with investors lacking financial education and you have the recipe for a bubble.
Historically the market always wins. There has never been an example in history where the market has not won. This is what makes the current bubbles that have been forming since the early 2000’s so dangerous. Yes we slightly deflated the bubble in 2008 but what is supporting the current housing craze in the states? The bottom line is bubbles always pop, and the market always wins. Maybe we have another year…maybe they kick the can down the road two years. All I know is when the bubble does finally pop those with liquid assets will have the best buying opportunity anyone has seen in the last 100 years. To many times people look at economic downside as a negative thing. For most it will be, but for those who get into a liquid position now will have the greatest buying opportunity of their lifetime. What separates those two groups of people is education. People scoff at paying for a financial education. I can promise you those without a financial education pay 100’s of times more than those who made the decision to learn to trade the market. On to the market!
EUR/USD Completes 61.8% Retrace Of Previous Move Up
Overall the Euro was pretty much all downside today with the exception of a brief push up during the US data release. The retrace today now makes a 61.8% retrace of the previous move up earlier this month. With that large of a retrace, anything further and we are probably headed for the big lows just above the 1.0800 area. At this point I’m still going to keep direction open today on the Euro and trade from any of the listed manipulation points if a valid entry occurs once the price gets there.
Today the Euro produced a long setup that would have resulted in a -20 pip loss. This trade occurred during the NY news candle at 8:30 AM Eastern. The 15M created both a stop run and confirmation up in one candle. We were in the room when this occurred and we did not take the trade. This will makes sense once you read the Pound commentary.
Exhaustion Reversal Setup Produces More GBP/USD Downside
Continuing with the trade I mentioned on the Euro. When the Euro was pulling back to give the entry long the Pound was giving a stop run reversal short setup. It is quite rare that we have both pairs setting up. In fact if you review the 2015 May Trade Analysis & Results video that covers every trade taken in May, or the June 2015 Bank Trading Setups video you won’t see this happen a single time. With July being over, that is at least 3 months without seeing this happen once.
The beauty of the forex bank trading strategy is how ‘black and white’ the setups are. In other words you know whether its a valid trade or not, and you know if its a loser or winner based on how specific our trading strategy rules are. With that being said, this is a rare exception where you have to make the choice between one or the other. Yesterday in the daily market review video for members as well as the yesterday’s forex commentary I wrote about the exhaustion reversal in the Pound and how further downside was likely. With that being said I have no idea why I didn’t pull the trigger short on the Pound as that agreed with my directional bias. To be honest I count that as a mistake on my part. I don’t get frustrated when I take a loss because that is part of being a successful forex trader. Making a mistake is however avoidable which is why this one was quite frustrating for me. I guess there are worse scenarios than a ‘no trade’.
Today on the Pound I’m still going to choose manipulation points on both sides of the price and remain open on direction. The Pound has some really quality manipulation points today and therefore I’ll let a valid setup from any listed level make the choice on direction for me. I would probably have a higher probability of more downside if the Pound didn’t retrace such a large portion of the earlier push down. Another point is what I mentioned on Monday, that is the overall positioning of Smart Money that we can see through the COT data (commitment of traders). They showed a big shift from moving further short to strong buying pressure coming in. Its so important to take this data with a grain of salt. Smart Money can take much more pain than you or I would be willing to do (or can) and therefore they may begin to buy a few hundred pips before the price turns up. Another option is they may not be shifting long at all, they may be simply closing more short side to limit risk in the event of a move up. Either way it does support a bias to the upside but it is one piece of the puzzle, not a reason to take an entry. That is why its so important to have a short term day trading strategy that can get you in the market with a low risk/high reward entry.
Forex News For July 31st 2015
CAD GDP M/M 8:30 AM Eastern: CAD GDP is a big market mover. If your trading a CAD based pair then you need to make sure your protecting your trade going into the release. This is expected at .1 tomorrow but make sure to check multiple news outlets before the release as they tend to update very close to the news with CAD data. Any deviation of .2 +/- from the expected number will create a decent spike.
US Chicago PMI 9:45 AM Eastern: This is released to a select few at 9:42 AM Eastern before the general public gets it. If you don’t have access to the early release then there is not point in looking at the 9:45 release because the only people getting the news at that time are the people that cannot move the market. This release is expected at 50.7 and with a 5 point deviation +/- from the expected number you will see a decent spike.
US Consumer Sentiment 10:00 AM Eastern: This is a non event in the market. I’m sure a huge deviation could create a 10+ pip spike but to this point it hasn’t been moving the market more than a few pips.
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