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Non-Farm Payrolls Drop for the First Time in 4 Years, Adding Pressure on the Fed to Do More

Non-Farm Payrollls were released this morning and if you think job growth was bad in December, they were worse in January. 17k jobs were lost last month, which is the first official decline since August 2003. No one can argue that these numbers are not recessionary levels and the Fed has no choice but to continue to lower interest rates.

The private sector added only 1k jobs while the public sector cut 17k. The biggest job losses were seen in the manufacturing , financial and business services. Average weekly hours also dropped for the first time in 6 months. The only good news is that December payrolls were not as bad as initially advertised. The BLS reported a 64k upward revision, bringing December NFP back up to 82k. The unemployment rate dropped from the psychologically crippling 5.0 percent level back down to 4.9 percent.

For the Fed this could mean another 50bp at the March meeting, but don't forget that February payrolls will be released before the next rate decision. For the US dollar, expect more weakness, particularly against the Japanese Yen. Carry trades will also suffer since further stress in the US economy will reduce the market's appetite for risk.

Originally we expected a return gradualism, meaning that the 50bp rate cut would be followed by a smaller move, but at this point, we may even see another intermeeting cut. A return to 1.00 percent interest rates is also a realistic possibility. Traders should hold their horses however since we have over 6 weeks before the next rate decision and incoming economic data could easily change the Fed's minds.

Canadian Dollar Offering A Volatile Range Trade Against The Yen

With much of the major, scheduled economic data that has ties to general risk trends and global interest rate trends past us, there is a little breathing room for taking range trades in the more volatile pairs. Certainly, CADJPY is an active pair with significant intraday swings; yet its range is appealing, whereas those congestion bands the majors have already put in for significant pull backs and are no longer actionable at current levels.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2007/12/fxcmtr/Range/2008.02.01.img.gif

Trading Tip – With much of the major, scheduled economic data that has ties to general risk trends and global interest rate trends past us, there is a little breathing room for taking range trades in the more volatile pairs. Certainly, CADJPY is an active pair with significant intraday swings; yet its range is appealing, whereas those congestion bands the majors have already put in for significant pull backs and are no longer actionable at current levels. Our suggested strategy is for a short; and we wouldn’t recommend a long trade on this range as support is comprised of long tails, which suggests it is relatively unstable. At the same time, the short at range resistance is still a somewhat risky trade because of the rally beyond the ceiling back on Wednesday. Our stop does not cover this spike high as it is far too wide. For cautious traders, we recommend taking this position at half your normal size; or the size can be reduced and the stop set wider to improve our chances of a successful trade. To avoid excess risk we will cancel any open orders before Friday’s Canadian employment data or if price hits 105.50 before we are entered.

Event Risk Canada and Japan

Canada – Canadian economic event risk will center on a significant Net Change in Employment report due February 8, while earlier Ivey Purchasing Managers Index figures could likewise cause short-term Canadian dollar volatility. Given a relatively bearish outlook for Canadian economic growth, analysts feel that both the Ivey PMI and the Net Change in Employment report will show lackluster results for the month of January. Yet it is exactly these bearish expectations that leave risks to the upside ahead of the data releases. If either number comes significantly above consensus forecasts, we may see Canadian interest rate outlook improve and a subsequent rally in the CAD. Otherwise, traders will watch for results from a Friday morning Housing Starts report. Given that the first major piece of economic event risk will be seen on Wednesday, we believe that the coast remains relatively clear for short-term CADJPY range trade.

Japan – The Japanese yen has digested a number of its top-tier economic indicators over the past week. However, the coming week holds at least a few indicators of interest. The first noteworthy doesn’t blip on our radar until Wednesday with the preliminary Leading Economic Index for December. This indicator – used to project growth over the come one to two quarters – has been bouncing off its record lows over the past few months, so a notable print may be in order. On the following day, the export sensitive machine orders and machine tool orders will print, defining expectations for foreign demand and shipments. Finally, Friday brings the Eco Watchers survey. The indicator hasn’t been a big price mover recently, yet it still holds considerable potential nonetheless.

Euro Commodity Crosses In Corrective Declines

EURAUD
EURCAD
EURNZD

Commentary – Last week we wrote that “we favor a deeper correction because wave 5 of the 1.5491-1.7159 rally was extended, and extended 5ths are often fully retraced. This is just in front of the 61.8% of 1.5491-1.7159 at 1.6128. Potential support prior to that level is the 50% at 1.6325 (11/19 low is at 1.6316). (note, W-X--Y indicates that a larger complex correction is unfolding). An alternate count suggests that larger wave 2 is complete at 1.6476.” The deeper decline that we expected is underway now so look for support near 1.6130. Follow developments in the Elliott wave forum.
Strategy – Getting bullish near 1.6150
http://www.dailyfx.com/export/sites/dailyfx/story-images/2007/12/currency_crosses/currency_crosses/CCross1_2-1.gif
Commentary – Last week, we wrote that “a setback is due and support should be strong in the 1.4666/1.4824 zone. This is former congestion and is defended by the 50% of 1.1462-1.5198 at 1.4678.” Price made a low at 1.4670 this week before rallying back to 1.4958 but the rally to this level was in 3 waves. Expect a drop below 1.4670 next week and look for support near 1.4558.

Strategy – Flat
http://www.dailyfx.com/export/sites/dailyfx/story-images/2007/12/currency_crosses/currency_crosses/CCross2_2-1.gif
Commentary – It is still possible that a triangle is unfolding but 1.8510 must hold in order for the structure to remain intact. If 1.8510 gives way, then look for a retest of the 61.8% of 1.7030-2.0186 at 1.8242 and maybe a drop to the 78.6% at 1.7706 in order to complete a flat before the big bull run gets underway.
Strategy – Bullish, against 1.8510, target is above 2.1122 (July 2006 high)
http://www.dailyfx.com/export/sites/dailyfx/story-images/2007/12/currency_crosses/currency_crosses/CCross3_2-1.gif

USDCAD Trade Opportunity Next Week

The USDCAD is back below parity so naturally, traders are wondering whether the drop from 1.0378 is the beginning of a bearish leg that will test the November low just above .90. The short term pattern indicates that this is a possibility and we have identified a low risk entry point.

The pattern in the USDCAD since the November low at .9055 is either an A-B-C rally that will lead to a new low (under .9055) or a 1-2 (expanded flat) base that will lead to a strong rally to new highs (suggesting that a multi-year USDCAD low is in place). Either way, price will come below .9755. Potential support from Fibonacci is at .9652 and .9511. Be sure to visit the Elliott Wave forum for trading ideas and updates to this pattern.

The short term pattern is clear and indicates the bearish potential mentioned above. The decline from 1.0378 is clearly a 5 wave decline and an -a-b-c correction is underway now towards 1.0117 (former 4th wave), which is defended by the 50% at 1.0124. The next level of resistance is the 61.8% at 1.0184. Look for a top and reversal near these levels in order to position for a drop below .9755.

Why Did the Dollar Rally on Negative Non-Farm Payrolls?

• Euro: Unable to Break 1.49
• British Pound Falls Ahead of Next Week’s Bank of England Rate Decision

Why Did the Dollar Rally on Negative Non-Farm Payrolls?
Earlier this week, the Federal Reserve told the markets that the reason why they lowered interest rates by 50bp to 3 percent was because the labor market is weak. However, the severity of the problems with job growth was not clear until the release of this morning’s non-farm payrolls report. In the month of January, non-farm payrolls fell for the first time in 4 years. The 17k jobs that were lost, makes it difficult to argue that the US economy is not already in a recession and as a result, the Federal Reserve will need to continue to lower interest rates. Unless there is a strong rebound in job growth during the month of February, it is realistic to expect a back to back half point rate cut. Given the weakness of the non-farm payrolls numbers and the implications for where interest rates are headed next month, the US dollar should have sold off, but it didn’t. There are a number of reasons to explain this bizarre price action. First, another 50bp was already priced into the futures market and even though there was a knee jerk reaction across the financial markets, traders quickly realized that nothing has changed. Bond yields are only off slightly and rate cut expectations remain the same. We also have over 6 weeks before the next interest rate decision and surprisingly strong retail sales, consumer prices or February non-farm payrolls could easily change the Fed’s outlook on interest rates. Also, not all of the news released today was bad news. The unemployment rate declined to 4.9 percent from the psychologically crippling 5 percent level while manufacturing ISM rebounded strongly in the month of January. Prices paid also surged to the highest level in 18 months, reflecting growing inflationary pressures. On top of that the ECB announced that they will no longer be extending their dollar lending facility. According to IFR Markets, there has been speculation that some accounts have been borrowing the cheaper USD facility and using it to fund higher cost positions such as EUR and GBP. When the ECB put an end to that today, these accounts might have bought back dollars to repay their loans. In the week ahead, the US economic calendar is light with only factory orders, service sector ISM and pending home sales due for release. We continue to expect most of these numbers to be dollar negative.

Euro: Unable to Break 1.49
For the EUR/USD, the 1.49 price level seems to be an insurmountable barrier. Eurozone economic data was stronger than expected and US data was weak, but still the Euro failed to close above 1.49. Despite the strength of the currency and the deterioration of US growth, manufacturing activity actually accelerated in Germany, France and Italy during the month of January. Data such as this is the primary reason why the European Central Bank remains stubbornly hawkish. They will be meeting to decide on interest rates again next week and even though rates are expected to be left unchanged for the eighth consecutive month, all traders should keep an eye on the comments made by ECB President Trichet at the accompanying press conference. Will he express any concern about growth or will he focus completely on preventing inflation from having second round effects on the Eurozone economy. Meanwhile Switzerland also reported improvements in manufacturing activity with the Swiss PMI index rising from 61.3 to 61.6. Swiss consumer prices are due for release next week and even though they are expected to drop, it will not alter the Swiss National Bank’s plans to keep interest rates unchanged.

British Pound Falls Ahead of Next Week’s Bank of England Rate Decision
The British pound was the worse performing currency today, having fallen over 1 percent against the US dollar and Japanese Yen. The pace of growth in the manufacturing sector slowed in the month of January which is part of the reason why the pound weakened but the other reason is because the Bank of England will be announcing an interest rate decision next week and the market expects them to lower rates by 25bp. Next to the US Federal Reserve, they are expected to be the central bank that lowers interest rates most aggressively. The economy has been on a downward spiral, led by a rapid deterioration in the housing market. In addition to the BoE decision, we are also expecting construction sector PMI, service sector PMI and industrial production. We expect most of these numbers to be pound bearish, taking the currency pair back down to 1.95.

Australia, New Zealand and Canada Look Forward to Busy Data Week
Despite a sharp sell-off in commodity prices, the Australian and New Zealand dollars extended their gains while the Canadian dollar recovered from Thursday’s losses. Economic data was mixed with a contraction in manufacturing activity in Australia offset by a sharp rise in the commodity price index. Canada also reported a jump in industrial product prices but slower growth in raw material prices. The Commodity Currencies will be in play next week with the Reserve Bank of Australia announcing an interest rate decision, New Zealand and Canada reporting employment figures and Canada releasing IVEY PMI. A strong labor market and rising inflationary pressures is expected to push the RBA to raise interest rates to 7 percent. If they raise rates, they would be the last ones standing.

Correlation between Carry Trades and Equities Continue to Breakdown
Throughout this past week, we have talked about how we expect the correlation between carry trades and equities to break. We saw countless examples of this including today when the Dow rallied 92 points and carry trade currencies such as EUR/JPY and GBP/JPY actually weakened. Traders are hesitant to take on risk even though they are buying stocks. Volatility remains high which makes it difficult for carry trades to rally. We expect this trend to continue amidst the lack of market moving numbers out of Japan next week.

Forex Options Signal Euro Breakout Potential in Week Ahead

Implied volatility is one of the most tried and true methods for objectively measuring expected volatility in the spot market. Derived from currency options with different maturities, implied volatilities are used to help predict potential movements in the spot market and is one of the most popular strategies of systems traders and other professional hedge funds.

At its most fundamental, the basic and intuitive interpretation of this implied data is often the most telling for traders. Taken alone, a steady rise in the longer-term implied volatility (the red line) is indicative of a strengthening trend; while inversely, a decline often reveals that a period of range or consolidation in spot is ahead or already in place. Additionally, the histogram or spread between the shorter and longer-term implied volatilities (the blue colored bars) tells a different perspective. As the histogram rises, volatility is expected to pick up faster in the near future relative to the longer-term range. Ultimately, this increases the probability of a breakout scenario in the underlying currency.

EURUSD
Our range-breakout barometer continues to predict that the euro will see large price swings in the week ahead. Given two-week implied volatilities significantly above their three-month counterparts, options traders are clearly gearing up for further sharp price moves through shorter-term trade. That said, we likewise see that three-month vols have fallen a bit from their recent heights, and such moderation suggests that we will subsequently see volatility slow from recent levels. Current conditions nonetheless suggest that breakout strategies will prove the most effective in the coming two weeks of EURUSD trade.

SPOT PRICE READING
1.4821 Breakout
LAST WEEK'S SPREAD
1.23

GBPUSD
Our range-breakout barometer accurately predicted the continued surge in British Pound volatility, but a more recent moderation in implied vols suggest that GBPUSD price action may slow in the week ahead. Last week we wrote that a two week-three month implied spread of 0.72 clearly signaled that traders were gearing up for sharp price moves. The spread has more recently dropped to 0.28 and longer-term implied volatilities have fallen from their heights—both clear signals that realized volatility will likely slow through the upcoming days. Of course, with a BoE rate decision due Thursday, we would suggest to look for moderate volatility in the week ahead.

SPOT PRICE READING
1.9672 Moderate Volatility
LAST WEEK'S SPREAD
0.72


USDJPY
Our volatility outlook for the USDJPY is similar to that of the GBPUSD, with a drop in our implied volatility spread and longer-term vols both signaling a slowdown in USDJPY price action through the coming days. Indeed, we see that implied volatility on 3-month options has fallen by over two percentage points within a relatively short period of time. Yet we hesitate to call for rangebound conditions on the extremely risk-sensitive currency pair. Our range-breakout bias subsequently calls for moderate USDJPY volatility in the week ahead.
SPOT PRICE READING
106.36 Moderate Volatility
LAST WEEK'S SPREAD
0.88

Canadian Dollar Offering A Volatile Range Trade

With much of the major, scheduled economic data that has ties to general risk trends and global interest rate trends past us, there is a little breathing room for taking range trades in the more volatile pairs. Certainly, CADJPY is an active pair with significant intraday swings; yet its range is appealing, whereas those congestion bands the majors have already put in for significant pull backs and are no longer actionable at current levels.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/02/fxcmtr/Range/2008.02.01.img.gif

Trading Tip – With much of the major, scheduled economic data that has ties to general risk trends and global interest rate trends past us, there is a little breathing room for taking range trades in the more volatile pairs. Certainly, CADJPY is an active pair with significant intraday swings; yet its range is appealing, whereas those congestion bands the majors have already put in for significant pull backs and are no longer actionable at current levels. Our suggested strategy is for a short; and we wouldn’t recommend a long trade on this range as support is comprised of long tails, which suggests it is relatively unstable. At the same time, the short at range resistance is still a somewhat risky trade because of the rally beyond the ceiling back on Wednesday. Our stop does not cover this spike high as it is far too wide. For cautious traders, we recommend taking this position at half your normal size; or the size can be reduced and the stop set wider to improve our chances of a successful trade. To avoid excess risk we will cancel any open orders before Friday’s Canadian employment data or if price hits 105.50 before we are entered.

Event Risk Canada and Japan

Canada – Canadian economic event risk will center on a significant Net Change in Employment report due February 8, while earlier Ivey Purchasing Managers Index figures could likewise cause short-term Canadian dollar volatility. Given a relatively bearish outlook for Canadian economic growth, analysts feel that both the Ivey PMI and the Net Change in Employment report will show lackluster results for the month of January. Yet it is exactly these bearish expectations that leave risks to the upside ahead of the data releases. If either number comes significantly above consensus forecasts, we may see Canadian interest rate outlook improve and a subsequent rally in the CAD. Otherwise, traders will watch for results from a Friday morning Housing Starts report. Given that the first major piece of economic event risk will be seen on Wednesday, we believe that the coast remains relatively clear for short-term CADJPY range trade.

Japan – The Japanese yen has digested a number of its top-tier economic indicators over the past week. However, the coming week holds at least a few indicators of interest. The first noteworthy doesn’t blip on our radar until Wednesday with the preliminary Leading Economic Index for December. This indicator – used to project growth over the come one to two quarters – has been bouncing off its record lows over the past few months, so a notable print may be in order. On the following day, the export sensitive machine orders and machine tool orders will print, defining expectations for foreign demand and shipments. Finally, Friday brings the Eco Watchers survey. The indicator hasn’t been a big price mover recently, yet it still holds considerable potential nonetheless.

Carry Trade - Buy or Sell?

Written by Antonio Sousa, Quantitative Strategies Analyst

Last week, the DailyFX Dynamic Carry Trade Portfolio was down by 351 pips. The most unprofitable trade was the position we held in the British pound with 241 pips gain in capital depreciation offset by $28 on interest payments accumulated along the last 5 days. Looking ahead, the current circumstances favor a further unwind of carry trades which could benefit lower yielding currencies like the Japanese yen and the Swiss franc. In fact, like we said in our Watch What the Fed Watches weekly report, despite the recent easing on financial conditions, confidence among traders in all the measures adopted by central banks to fight the credit crunch remains very poor. Short term interbank lending rates remain well above government bond yields of similar maturity and what the market needs is more transparency regarding the true amount of the losses related with the U.S. subprime market collapse.

Additional InformationMaking

profitable carry trades are not as easy as they use to be. Therefore we have created a dynamic carry basket that changes when the monetary policy outlook for a central bank changes or if there is significant event risk ahead. Follow the performance of the DailyFX Dynamic Carry Trade Basket

What is Carry TradeAll that is needed to understand the carry trade concept is a basic knowledge of foreign exchange and interest rates differentials. Money shifts from around the world in seek of the highest yield and the benefit of trading currencies is that you are dealing with countries that have interest rates, which are charged or received every single day. If you are positioned on the side of positive carry, you have the right to earn that interest, which can be quite lucrative over time.

Protective Stop-Loss

Substantial gains made from interest rate differentials provide undeniable evidence that the carry trade strategy has been very successful over the past few years. Still, this strategy involves significant risks and an adequate protective stop is required. We are using a protective stop-loss equivalent to five times the average true range. Stop losses are activated when we have a weekly close below the specified stop level.

Position Sizing

Our position size varies according to each currency volatility. Generally, the more volatile the currency is, the fewer lots we trade. For example, let's assume you have $10,000 and you are trading 10K lots, you decide to limit your risk per trade to 3% or $300 and the 90 days average true range for the EURUSD is 100 pips. In this case, if you go long EUR/USD you could buy 3 lots, since ($10000 * 3%) divided by (0.0100*10K) = 3 lots. In case the final result is not an integer you should always rounded it down to limit your exposure.

Positioning Extremes And Open Interest Grow As FX Traders Return To The Market

• USDJPY – Rise in Long Interest Brings 107 Draws Carry Trade Unwind Closer
• EURUSD – Short Interest Rises Despite ECB Risk, 1.50 Still A Target
• GBPUSD – Longs Increase Despite Yet Another Break Of Support
• USDCHF – Open Interest Jump 17 Percent, As Longs Conviction Grows
• USDCAD – Short Positions Drop 15 Percent With Pair Back Above Parity

EURUSD – The ratio of long to short positions in the EURUSD stands at -1.56 as nearly 61% of traders are short. Yesterday, the ratio was at -1.64 as 62% of open positions were short. In detail, long positions are 11.4% higher than yesterday and 37.7% stronger since last week. Short positions are 5.6% higher than yesterday and 27.4% stronger since last week. Open interest is 7.8% stronger than yesterday and 19.6% above its monthly average. The SSI is a contrarian indicator and signals more EURUSD gains. The increase in open interest and slight downtick in the SSI is likely a component of tomorrow’s ECB event risk. Though, with euro traders adding to their short positions week over week, the contrarian SSI gives us a signal to buy euros. We maintain our belief that the EUR/USD could test 1.50 in the weeks ahead.

GBPUSD – The ratio of long to short positions in the GBPUSD stands at 1.79 as nearly 64% of traders are long. Yesterday, the ratio was at 1.49 as 60% of open positions were long. In detail, long positions are 24.2% higher than yesterday and 38.0% stronger since last week. Short positions are 3.2% higher than yesterday and 17.2% weaker since last week. Open interest is 15.8% stronger than yesterday and 22.0% above its monthly average. The SSI is a contrarian indicator and signals more GBPUSD losses.

USDJPY - The ratio of long to short positions in the USDJPY stands at 1.76 as nearly 64% of traders are long. Yesterday, the ratio was at 1.83 as 65% of open positions were long. In detail, long positions are 7.2% higher than yesterday and 11.6% stronger since last week. Short positions are 11.8% higher than yesterday and 15.2% weaker since last week. Open interest is 8.8% stronger than yesterday and 3.0% above its monthly average. The SSI is a contrarian indicator and signals more USDJPY losses.

USDCHF - The ratio of long to short positions in the USDCHF stands at 1.43 as nearly 59% of traders are long. Yesterday, the ratio was at 1.36 as 58% of open positions were long. In detail, long positions are 19.6% higher than yesterday and 7.5% stronger since last week. Short positions are 13.9% higher than yesterday and 10.7% stronger since last week. Open interest is 17.2% stronger than yesterday and 7.8% above its monthly average. The SSI is a contrarian indicator and signals more USDCHF losses.

USDCAD – The ratio of long to short positions in the USDCAD stands at 1.88 as nearly 65% of traders are long. Yesterday, the ratio was at 1.75 as 64% of open positions were long. In detail, long positions are 0.7% higher than yesterday and 1.8% weaker since last week. Short positions are 6.1% lower than yesterday and 15.1% stronger since last week. Open interest is 1.8% weaker than yesterday and 3.2% below its monthly average. The SSI is a contrarian indicator and signals more USDCAD losses.

How to Interpret the SSI? The FXCM SSI is based on proprietary customer flow information and is designed to recognize price trend breaks and reversals in the four most popularly traded currency pairs. The absolute number of the ratio itself represents the amount by which longs exceed shorts or vice versa. For example if the EURUSD ratio is 2.55, long customer orders exceed short orders by a ratio of 2.55 to 1. Conceptually similar to contrarian analyses using the CFTC IMM open position data or COT Report, the SSI provides an alternative approach that is both more timely and accurate in forecasting currency price movement. The SSI is a contrarian indicator that tells you how the market is weighted and where the trend may head. More long positions don't necessary suggest more confidence in the direction of the current trend. In general, when traders start having adverse movements against their position, many tend to increase the size of their position with the purpose to average down their entry price in one last attempt to recover from previous losses. However, the higher the number of short orders in a bull market the more dangerous is to take additional shorts because many of those traders who just entered the markets are also leaving their protective stop losses just above the current price action.

British Pound Volatility Reading Suggests Trend Underway, Though Risk Ahead

Written by John Kicklighter, Currency Analyst

Implied volatility is one of the most tried and true methods for objectively measuring expected volatility in the spot market. Derived from currency options with different maturities, implied volatilities are used to help predict potential movements in the spot market and is one of the most popular strategies of systems traders and other professional hedge funds.At its most fundamental, the basic and intuitive interpretation of this implied data is often the most telling for traders. Taken alone, a steady rise in the longer-term implied volatility (the red line) is indicative of a strengthening trend; while inversely, a decline often reveals that a period of range or consolidation in spot is ahead or already in place. Additionally, the histogram or spread between the shorter and longer-term implied volatilities (the blue colored bars) tells a different perspective. As the histogram rises, volatility is expected to pick up faster in the near future relative to the longer-term range. Ultimately, this increases the probability of a breakout scenario in the underlying currency.

Weekly Trading Lesson: Pick the Strongest Trends to Trade...Continued

Written by Thomas Long, FX Power Course Instructor

Last week we discussed that while the USD/CAD showed a strong downtrend through most of 2007, the current situation is a little unclear. We won’t be able to confidently know the direction of the trend until more trading has taken place, but that does not mean we should not trade. This is the time to search out the new currency pairs that are currently in strong trends on daily charts. As I write this I see the daily chart of the EUR/GBP to be in a strong uptrend with the daily chart of the GBP/CHF showing a strong downtrend. The relationship is the current weakness of the GBP. The reason is that the Bank of England has now adopted a bias towards lowering their interest rates instead of raising them. This is one of the main reasons the USD was weak in 2007 as they were the only major country lowering interest rates. Interest rates are the biggest determining factor in the value of a currency. Higher interest rates usually lead to a higher currency value while lower interest rates usually lead to a lower currency value. So now that the Bank of England is lowering interest rates, we see a weak GBP against most other currencies. Changing your opinion of the strength of the trend in each pair is something that has to be done frequently. Just because one made money selling the USD/CAD last year does not mean that this is the pair to trade this year. Finding the strongest trends to trade is still the first step in finding a solid trading opportunities.

Buy/Sell Forex Signals for Ranging Markets

Why the Forex Market ChangedThrough the 1980s and 1990s, and even into the new century, the distinctive characteristic of the foreign exchange market was its volatility—a volatility that was a reflection of major imbalances between national economies. When a country over-spent or over-borrowed, or when its external trade went wildly out of balance, its interest rates were forced up and its economic growth slowed down. In the forex market, the country's currency also paid the price—usually by sudden and sometimes drastic devaluation. In short, economic imbalance generated currency volatility.

Increasing globalization has changed all that. In today's world of tightening economic interdependency, it is in every country's interest to maintain economic and financial stability—even if it costs. Countries with a trade surplus (in particular China) now effectively underwrite countries with a trade deficit (in particular the US) in the name of stability and an orderly market. As a result, interest rate differences are compressed and currency volatility is minimized.

The New Range-Bound Forex MarketThe forex market has undergone a profound change. In past years, a trade imbalance or an interest rate shift could suddenly move a currency price hundreds of pips. For that reason, success in the forex market followed a traditional formula: Cut your losses short, but let your profits run. Traders took small losses quickly, but rode big trends for big wins. A volatile forex market rewarded breakout traders.

Using that formula, professional traders were disciplined enough (or their black boxes were disciplined enough) to absorb several small losing trades, because their one, very large win more than made up for them. Using a breakout trading system, only 30% of the trades had to be winners, because the payoff on a breakout trade could be six times the total of the losses. The risk/reward ratio and the mathematical probabilities were in their favor.

How to Trade in the New Forex Market—With the New MathRecently, however, traders have been searching in vain for that kind of explosive breakout market. Thanks to the new interconnected, stability-first world, the formula, the market—and the mathematics—have all changed. Forex is no longer a market in which the trader can exploit volatility. (Our best estimate is that volatility in the major currency pairs has fallen over 50% in the last three years.) Unfortunately, too many traders—even professionals with years of experience—have been slow to adjust, and have paid the price. Accumulating a half-years' worth of small losses (by continually being stopped out), they can no longer make up those losses, because the huge breakout they need is not there.

Instead, in a market where the price moves inside a support-resistance tunnel, it can be possible for the trader to profit by overwhelming one major losing trade with several small ones. The new math says that by trading in a range, 90% of the trades can be winners offsetting losing trades, and that a 200-pip loss can be more than offset by a collection of 30-pip wins, taken by harvesting tops and bottoms as the price oscillates inside its price tunnel. No matter which way the currency price travels, its natural tendency is to move back and forth inside defined price channels. The trader takes small profits quickly, sets up generous 200-pip holds to avoid being stopped out, and waits for the price to retrace.

Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.

Using Buy/Sell Signals to Exploit the New Forex MarketThe Buy/Sell Signals system is the only trading tool designed specifically for today's range-bound forex market. In constructing the system, the FXCM Research Group incorporated those technical indicators that have demonstrated the highest reliability in pinpointing currencies with a natural tendency to move back and forth inside price channels for weeks and sometimes months at a time.

A computer-generated automatic signal system, Buy-Sell Signals alert you as to which currency pair is in ranging mode, withClear, unambiguous trade ideas—for short, medium and long-term strategies;Real-time entry and exit points to aid you in buying at support and selling at resistance;Precise stop/limit levels.

Another advantage of a range-bound trading strategy is that it offers more trading opportunities for any trading schedule. Almost always one or another currency pair is in a ranging market. And since Buy-Sell Signals are updated continually around the clock, you can find trade ideas on your own time schedule, and remote control your trading with built-in stops and limits.

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