Something to read

Are stock and forex markets interlinked?

THE recent appreciation of the rupee and the consequent swings in stock exchanges brings interesting observations for businesses and stockbrokers.

In volatile and less integrated financial markets in developing countries, the important question is: whether there exists a volatility transmission between the stock and foreign exchange markets.

This article aims at examining the dynamics of volatility transmission between the stock and foreign exchange markets in Pakistan, because the interdependence between exchange rates and stock prices has important implications.

For example, increase in stock prices would attract capital, which increases the demand for domestic currency and causes the exchange rate to appreciate.

In particular, this study addresses the nature of volatility spillover between the two markets with reference to Pakistan.

We use data that covers three important market events that influenced the dynamics of stock and foreign exchange markets: the nuclear tests of May 1998, the terrorist attacks of September 11, 2001, and the global financial crisis sparked by the US sub-prime market failure in the middle of 2007.

Such market events can influence the underlying dynamic relationship between the equity and forex markets. This study empirically examines the short-run dynamic relationship between stock prices and exchange rate, which is useful for financial managers in making informed investment decisions.

Like many other developing economies, Pakistan has gone through a series of institutional and financial reforms since 1990 to reduce financial imbalances, enhance efficiency and depth of financial markets, and modernise the domestic financial sector.

The liberalisation of stock markets resulted in a sharp increase in inflow of portfolio investment, which not only helped in raising the investable funds, but also produced wild swings in stock market indices.

Despite the ongoing political crisis and a credit rating downgrade by Moody’s, Pakistan stood out as the best performing Asian Market in July 2012, as measured by the Morgan Stanley Capital International (MSCI) index.

Similarly, the foreign exchange market has also showed a high degree of volatility since 1998. For example, the rupee depreciated against the dollar from Rs43.19 in 1998 to Rs61.41 in 2001-02, and to Rs94.10 a dollar in August 2012. Currently, the rupee-dollar parity stands at about 99.

Exchange rate uncertainty may likely transmit shocks to stock markets. Therefore, awareness about inter-market volatility transmission is critical for the pricing of securities within and across markets for trading, hedging strategies and formulation of regulatory policies and portfolio management.

Furthermore, the link between stock and foreign exchange markets could be used to predict the future path of exchange rates, which provide could guidance to multinational corporations to manage their exposures with respect to risk that exchange rate fluctuations generate.

The results of empirical analysis suggest that exchange rate return produces no significant impact on stock return, whereas stock return exerts significant negative effects on exchange rate changes. Our results also depicted that 9/11 and the global financial crisis had little influence on Pakistan’s foreign exchange market. In contrast, the stability of the stock market was significantly influenced by the May 1998 nuclear tests.

The results support the existence of bidirectional volatility spillovers and asymmetric effect from stock returns to exchange rate changes.

Overall, these results show a significant information flow between the two markets, and that these markets are interdependent. This interdependence employs and confirms the volatility transmission between these two markets, as well as the recent appreciation in the rupee and its impact on the stock market. This is also confirmed with empirical results.

It appears from the analysis that structural shifts on the global and domestic fronts increases volatility of stock and foreign exchange markets. Therefore, there is a need to enhance the shock absorptive capacity of financial markets, especially during periods of crisis. To this end, the authorities may take appropriate measures to broaden the financial markets because Pakistan’s financial markets lack connectivity in terms of returns.

For example, reduction in capital gain tax may weaken the monopoly power of big investors and provide investment prospects, like in small and medium enterprises, mutual funds and IPOs to small investors to participate in stock market activities.

The authorities could also develop a framework for bringing down transaction time for settlement of securities, increase liquidity and market capitalisation, establish equity funds, encourage diversification of equity portfolios and adopt modern ways of transacting.

On the foreign exchange market front, authorities may take appropriate measures against those commercial banks (i.e. authorised forex dealers) responsible for unnecessary rupee depreciation against the dollar and other foreign currencies, and restore the exchange rate as well as financial stability.

The SBP may monitor the impact of stock price fluctuations on foreign exchange market, because investment earnings and the behaviour of international investors heavily depend on forex market trends.

An evidence of bidirectional volatility spillover across the markets indicates some degree of market inefficiency and uncertainty, which may shake investors’ confidence. It is, therefore, imperative to regulate and monitor both markets in order to minimise the adverse effect of volatility on investment decisions.

Market Sense & Nonsense ~ Jack D. Schwager



When it comes to the markets, academics, professionals and novice investors have one thing in common: They all operate on assumptions that fail to hold up in the harsh light of reality. The following are a sampling of observations about how markets really work:

The market is not always right. The best opportunities arise when the market is most wrong.
Big price moves begin on fundamentals but end on emotion.
Past returns are not future returns. Past returns can be very misleading if there are reasons to believe that future market conditions are likely to be significantly different from those that shaped past returns.
The best-performing past investments often do worse than the worst-performing past investments in the future--and the future after all is where we all have to make our investment decisions.
The best time to initiate long-term investments in equities is after extended periods of underperformance.
Faulty risk measurement is worse than no risk measurement at all because it will lull investors into unwarranted complacency.
Volatility is frequently a poor proxy for risk. Many low volatility investments have high risk, while some high volatility investments have well-controlled risk.
The real risks are often invisible in the track record.
High past returns sometimes reflect excessive risk-taking in a favorable market environment rather than manager skill.
Return alone is a meaningless statistic because return can always be increased by increasing risk. Return/risk should be the primary performance metric.
Leverage alone tells you nothing about risk. Risk is a function of both the underlying portfolio and leverage. Leveraged portfolios can often be lower risk than unleveraged portfolios--it depends on the assets in the portfolio.

Using Microsoft Is Cheaper Than Free Software Says Government Chief Information Officer

It is hard competing with the world’s largest software company, but it can seem virtually impossible when even giving away your products is deemed too expensive. That is the point made by UK government Chief Information Officer for Hampshire Jos Creese and it throws a spotlight on the huge challenge faced by any company trying to compete with a giant like Microsoft MSFT +0.23% or Apple AAPL -0.95%.

“We use Microsoft [and] each time we’ve looked at open source for desktop and costed it out, Microsoft has proved cheaper,” said Creese in an interview with Computing. “Microsoft has been flexible and helpful in the way we apply their products to improve the operation of our frontline services, and this helps to de-risk ongoing cost. The point is that the true cost is in the total cost of ownership and exploitation, not just the licence cost.”

Creese isn’t alone. While OpenSource.com gives an example of the adoption of open source software within the US Department of Veterans Affairs (VA) it admits the US government does not actively champion open source over proprietary Mac and PC solutions. This despite a government report that said tests prove Ubuntu 12.04 is more secure than both Windows and Mac OS. The US and UK governments have also publicly advised users switch from Internet Explorer after a security flaw blew holes in all versions of Windows which forced Microsoft to issue a dedicated patch to save XP after its support cut-off date in April.

Meanwhile hypocrisy abounds as both the US and UK governments have also agreed ‘survival deals’ with Microsoft to continue support for their PCs running Windows XP.

Hoping to change attitudes is UK cabinet office minister Francis Maude (pictured below), who is championing the adoption of open source software in government. Maude claims the UK could save “tens of millions” of pounds per year by ditching proprietary software and said roughly £200m ($340m) has been spent on Microsoft Office alone since 2010.

“The software we use in government is still supplied by just a few large companies. A tiny oligopoly dominates the marketplace,” argues Maude. “I want to see a greater range of software used, so civil servants have access to the information they need and can get their work done without having to buy a particular brand of software… We weren’t just missing out on innovation, we were paying top dollar for yesterday’s technology.”

Maude says some progress is being made: “One great example of the potential from small businesses was when we re-tendered a hosting contract. The incumbent big supplier bid £4m; a UK-based small business offered to do it for £60,000. We saved taxpayers a whopping 98.5%.”

Creese though defends his position saying “I don’t have a dogma about open source over Microsoft, but proprietary solutions – from Microsoft, SAP to Oracle ORCL -0.75% and others – need to justify themselves and to work doubly hard to have flexible business models to help us further our aims.”

Creese also warns that using smaller companies isn’t always practical. “There’s a huge dependency for a large organisation using a small organisation. [You need] to be mindful of the risk that they can’t handle the scale and complexity or that the product may need adaptation to work with our infrastructure… A niche application is sensible in some areas, but you need to plan your exit strategy. If you go for a small supplier because you want to support SMEs and you’re not mindful of the risks, you may end up with difficulties later. If we are the larger clients of a small company and it gets into difficulty, what happens if they can’t sustain a system that schools are depending on?”

It is a valid claim, but coupled with the fact Microsoft also recently cut the price of Windows 8.1 by 70% to low cost computers and made Windows Phone 8 free on all sub 9-inch devices it shows the price war ahead. Of course it isn’t just Microsoft. Google GOOGL +0.13% – arguably Microsoft’s biggest rival – has long given away much of its software and services in exchange for access to aspects of user data.

“The point here is that you can have some policy objectives around how you’d like to see technology change in the public sector, wanting to make sure small suppliers don’t get squeezed out, and not having dependency on proprietary software where open source can do the same at lower cost,” concludes Creese. “But you need to do what’s best for the taxpayer, and sometimes that means a space can only be fuelled by a large supplier.”

Needless to say this is a debate which isn’t getting settled any time soon, but it would certainly help if government policies were more consistent and less hypocritical.

Inside Apple: How America's Most Admired--and Secretive--Company Really Works

INSIDE APPLE reveals the secret systems, tactics and leadership strategies that allowed Steve Jobs and his company to churn out hit after hit and inspire a cult-like following for its products.

If Apple is Silicon Valley's answer to Willy Wonka's Chocolate Factory, then author Adam Lashinsky provides readers with a golden ticket to step inside. In this primer on leadership and innovation, the author will introduce readers to concepts like the "DRI" (Apple's practice of assigning a Directly Responsible Individual to every task) and the Top 100 (an annual ritual in which 100 up-and-coming executives are tapped a la Skull & Bones for a secret retreat with company founder Steve Jobs).

Based on numerous interviews, the audiobook offers exclusive new information about how Apple innovates, deals with its suppliers and is handling the transition into the Post Jobs Era. Lashinsky, a Senior Editor at Large for Fortune, knows the subject cold: In a 2008 cover story for the magazine entitled The Genius Behind Steve: Could Operations Whiz Tim Cook Run The Company Someday he predicted that Tim Cook, then an unknown, would eventually succeed Steve Jobs as CEO.

While Inside Apple is ostensibly a deep dive into one, unique company (and its ecosystem of suppliers, investors, employees and competitors), the lessons about Jobs, leadership, product design and marketing are universal. They should appeal to anyone hoping to bring some of that Apple magic to their own company, career, or creative endeavor.

LONDON, May 12 (Reuters) - The boom years of financial market trading, when banks made unprecedented profits from bonds, currencies and commodities, may be over for good as financial firms realise there will be no cyclical upswing on their dealing desks.

Even though it's taken Western economies several years to regain pre-crisis national output levels, many doubt banks will ever revisit the pre-crisis high watermark of their trading activities.

Revenues from fixed income, currencies and commodities - the so-called 'FICC' universe - continued to tumble for most major U.S. and European banks during the first quarter of 2014, increasing the pressure on them to rethink business models.

Thanks to a more stringent regulatory environment and a potential turning point in the 20-year cycle of falling global interest rates, the twin peaks of just before and after the 2008 global financial crisis look unlikely to be revisited.

Revenue from FICC trading, which critics sometimes dub "casino banking" and distinguish from traditional investment banking services like underwriting share issues or arranging mergers and acquisitions, still accounts for over 70 percent of banks' overall income, according to research by Freeman.

FICC income at Goldman Sachs last year was 72 percent of the bank's overall revenue, compared with 82 percent in 2010. Morgan Stanley's FICC revenue was 70 percent of its total, well down from 82 percent in 2003.

As new regulation bites and extraordinary monetary and economic policies smother extreme market swings, the trading volumes and price volatility that middlemen banking traders thrive off has ebbed.

And it looks like a structural shift rather than a cyclical or temporary lull.

"The revenues have gone. The world has changed from 2007, 2008," said Grant Peterkin, head of absolute bond returns at Lombard Odier in Geneva.

"The regulatory aspect is the biggest aspect."

Regulation after the 2007-08 crisis such as 'Dodd-Frank' and 'Volcker Rule' legislation in the United States and Basel III banking reforms globally, effectively restrict banks' ability to hold, trade and speculate on fixed income and derivatives.

This reduces liquidity, but other traditional liquidity providers like hedge funds have been unable to fill the gap because their businesses are also under pressure.

IN A FICC

The pressure on banks' FICC operations was brought into sharp focus by the broad-based slump in first-quarter earnings.

British bank Barclays grabbed the headlines, posting a 41 percent plunge in trading revenue compared with the same period in 2013, then announcing 7,000 of its 26,000 investment banking jobs will be cut.

"Some of the pressures we saw on the business towards the end of last year are clearly structural as well as cyclical," Barclays Chief Executive Antony Jenkins told CNBC on Thursday.

Other bank chief executives are likely to follow Jenkins in terms of direction if not magnitude, and reduce the size of their FICC trading desk operations, analysts say.

They are expected to continue cutting costs, trimming headcount, and in some cases, exit particular markets.

UBS is withdrawing from parts of fixed income trading while Barclays has consolidated its G10 currency, emerging market foreign exchange and precious metals trading operations.

Elsewhere, JP Morgan Chase is selling its physical commodities business and Deutsche Bank is closing its oil, grains and industrial metals business.

Although Barclays' results may be an outlier and contrast with other extremes, such as the 35 percent increase in trading revenues at the likes of Morgan Stanley, the average decline in FICC revenue from 10 major U.S. and European banks in the first quarter was 14 percent.

That ongoing funk was all the more alarming as the first quarter is traditionally the most profitable for FICC trading, as pension and insurance funds open fresh investment positions for the year and companies and governments sell new bonds in an annual refunding splurge.

The 10 banks showed FICC revenues totaled $24.18 billion in the first quarter, down from just over $28 billion a year earlier and almost $30 billion for the same period in 2012.

The 10 are: Barclays, U.S. banks JP Morgan, Morgan Stanley, Goldman Sachs, Bank of America, Citi, and European firms UBS, Deutsch, BNP Paribas and Credit Suisse .

The collapse in market volatility has also contributed to the decline. This may be a relief for risk-averse investors but it also makes them less likely to use market hedging instruments sold by the banks.

It also reduces the arbitrage opportunities that nimble banks and brokers feed off for in-house trading profits.

Implied volatility, which measures the potential for asset price swings over a specific period, is at or close to record lows in deeply liquid and highly-traded assets like U.S. Treasuries, euro/dollar and dollar/yen .

Analysts also say the whiff of scandal resulting from global investigations into alleged rigging of benchmark foreign exchange rates and Libor interest rates is clouding the FICC environment, and forcing banks to set aside billions of dollars for potential litigation costs.

The final nail in the FICC coffin, analysts say, is that the world on the cusp of rising interest rate cycle, led by the U.S. Federal Reserve's reduction - or "tapering" - of its extraordinary post-crisis stimulus.

It's completely uncharted territory for banks and traders, and not conducive to making easy money.

"We've had the most enormous change," said Chris Wheeler, banking analyst at Mediobanca in London. "And there's more to come as the full impact of tapering is felt." (Editing by Sophie Hares)

Source : reuters.com

There were a handful of clear messages in the raft of European first quarter GDP data released on Thursday. By and large they were disappointing, showing a struggle for growth across the euro zone, with Germany providing the sole ray of light. Here’s what’s to know.

1 Much of the euro zone is struggling

Of the 13 member states that have reported quarterly numbers, Italy, the Netherlands, Cyprus, Portugal, Estonia and Finland all registered contraction on the previous three months. Of the remaining five, the Greek economy continued to shrink on a year on year basis during the quarter. And the French economy was static, showing no growth on the final three months of 2013.

Apart from Germany’s, most of these numbers fell short of expectations. Overall the euro zone managed just a 0.2% expansion on the quarter and 0.9% on the year against consensus forecasts of a 1.1% increase on the year.

What’s more, prospects for the second quarter aren’t much better. The first quarter numbers were boosted by weather-related factors, argued Peter Vanden Houte, an economist at ING Bank. Second quarter data are likely to give back some of those gains. Meanwhile, recent survey evidence and industrial production figures across the region have been disappointing–even from Germany.

2 Low inflation, even outright deflation, are not antithetical to growth

For instance, Hungary’s inflation rate turned negative in April, contracting 0.1% on the year, yet the economy had a storming first quarter, expanding 1.1% on the previous three months and 3.2% on the year.

Ditto for Poland. Polish consumer price inflation rate has been declining steadily and was only just positive on the year in April–at 0.3%–but it too had a storming performance during the first quarter, expanding 3.5% on the year.

3 Look outside the euro zone

As well as Hungary and Poland, the U.K. economy performed well, expanding 0.8% on the quarter and 3.1% on the year. Lithuania and Romania expanded 2.9% and 3.8% on the year respectively, although their quarterly rates of growth slowed during the first three months of the year.

Of course there are exceptions. Bulgaria, the Czech Republic and Denmark, which are all outside of the single currency region, have been finding growth hard to come by.

And this particular strength across the European Union’s eastern fringes could yet prove to be short lived. It doesn’t seem the Ukrainian crisis had much of an effect on growth during the first quarter, but the impact could yet show up in second quarter data.

Both investors and ECB President Mario Draghi have recently cited the confrontation between Russia and Ukraine as a source of downside risk for European economies.

4 The ECB has plenty of justification to pull on its monetary levers

Euro-zone consumer prices rose just 0.7% on the year in April, far below the ECB’s target of slightly under 2%.

ECB Vice President Vitor Constancio reiterated the central bank’s determination “to act swiftly if required” in a speech on Thursday. Mr Draghi made the point that the central bank’s governing council was holding off acting until more data was available in June. The first-quarter GDP numbers will undoubtedly help to tilt the balance towards action.

And investors are expecting it. The euro fell to 11-week lows in the wake of Thursday’s data releases. Euro-zone sovereign bonds have continued to rally and Germany’s equity market has tested all-time highs on the view that the ECB will provide more liquidity.

5 Japan's example suggests ECB action alone might not be enough

With much of the single currency region struggling to generate escape velocity and even the German economy looking vulnerable, some economists doubt the central bank will be willing or able to provide the scale of policy action needed to get member economies back to sustainable long term growth.

Even though Germany’s policymakers have increasingly come round to the idea that the ECB needs to do more to help growth and forestall a slide into deflation, there are doubts about whether the ECB might be able to pursue wholesale asset purchases like those undertaken by the Bank of Japan, the Federal Reserve and the Bank of England did with their quantitative easing programs.

Other policy tools open to the ECB, such as another long term refinancing operation to shore up bank lending, are likely to be less effective. Especially in light of the fact that euro-zone fiscal policy by and large remains contractionary as governments aim to bring their deficits to back under treaty thresholds.

What’s more, if aging populations are a primary driver of deflation, as some economists think, the euro zone’s poor demographics will prove to be another huge hurdle for the central bank.

Source : blog.wsj.com

“Instead of hoping he must fear and instead of fearing he must hope.He must fear that his loss may develop into a much bigger loss, and hope that his profit may become a big profit.”

-Jesse Livermore

We’re only in it for the money. That key trading concept is obvious but shouldn’t be forgotten. The reason why this mantra is key is because we’re not into trading for the following reasons:

-To Beat the Market

-To Show People How Smart You Are

-To Feel Excitement through use of Aggressive Leverage

Why Emotions Get Shunned By Traders

Some traders opt for an Automated Trading or Black Box strategy. The purpose of a black-box system is to have your preferred trading rules or edge programmed so as to put you into a trade and exit you from a trade when the edge is gone or the profit target is achieved. The argument of this approach is that your emotions can’t get in the way of you entering or exiting a trade. However, a trading career is made up of more than just on trade and if you do not have the emotional strength to stick with your edge, programmer or discretionary, then your emotions are still getting the best of you.



Either way, your emotions are at play. If you’re deciding when to enter the trade yourself, known as discretionary trading, your emotions are obviously at play. The way emotions effect newer traders is that new traders hope their losses will come back so they let them run in order to avoid booking a loss. They fear that their profits will turn into losses so they cut them short. However, this fear and hope tug-of-war doesn’t work out in the traders favor in the long term.



A Better Way to Look at Emotions

Emotions aren’t bad if you know how to steer them towards your benefit. By default, you likely don’t like being wrong or losing money, who would? However, taking a big picture view, being wrong sometimes and losing a little money when deciding if the market is going to move in the direction you believe it will, these two things aren’t that bad and are in fact, inevitable.

So a better way to look at emotions is to flip how you’re using hope and fear and most specifically fear. If you can switch your fear from a place of fearing a losing to trade to fearing a losing trade getting out of control, you’ll discover a key emotional truth to trading well, regardless of your balance.

As the opening quote mentions, instead of hoping that your loss will turn into a profit so you don’t look like a failure, you should hope that your profits grow larger while always fearing a large relative loss. By flipping these from there default function, you’re no longer holding onto a losing trading waiting for it to come back while closing out your good trades at a minimal profit afraid that the profit will slip through your fingers. As Michael Martin put it, that’s like pulling your flowers and letting your weeds flourish in hoping they change.

Applying Your Emotions to FX Trading Appropriately

So now that you know that your emotions are not your enemy when appropriately adjusted, what’s the best way to apply this information? This may come as a shock, but you need to start from the premise that you don’t know FOR SURE if your next trade will hit its protective stop or profit target. Of course, you’d prefer that every trade hit its profit target but by now, you know that’s not always the case.

However, like the picture from above, you’re not sure if the next trade will take you off the road you were planning on driving down (read: the trend bends or ends to get you out of your trade). Therefore, when you’re in a trade based on your edge or indicators, it’s best to keep an eye for trades that go against you from the start and see that it’s best to fear these trades and get out there or just accept that your profit target most likely will not get hit but whatever you do, don’t remove your stop and hope for a trade that goes sour right away. These are the trades you should rightly fear draining your equity.

On the flip side, if you’re entering at the right time and price (unbeknownst to you or not), and the trade goes in your favor right away, then it’s best to keep the hope in play that this could be a big move that makes your day, week, month, or year and move your stop up to break even when your system sees it appropriate.

I’ll leave you with a quote from Michael Martin that’s been helpful for me and I hope it does the same for you. “Winners never quit, but quitters have more equity in their accounts when they admit defeat and return tomorrow with a fresh start and a clear head.” This world of trading is a paradox, the trading paradox involves embracing losing trades early and often while allowing those few golden trades make your year.

Article written by Tyler Yell, Trading Instructor @dailyfx.com

Today’s Lesson Is Very Good. This is Probably One of the Most Crucial Aspects of Trading. ” To trade the news or to trade the price action ?”. Today I share my views on this interesting topic which can often be the main reason a trader fails. I am not a fan of trading the news or fundamentals, and this article explains why.

When You Finish Reading This Article, Please Remember To Click the Facebook Like Button Below & Make a Nice Comment Below or Post it To Twitter. Thanks and enjoy Today’s Lesson. Nial.

Forex news and Forex fundamental variables are topics that many traders email me about each week. They usually want to know if they should pay attention to the news as it relates to their trading and (or) how to incorporate fundamental economic news variables into their trading.

The fact of the matter is that as a price action trader I believe that all fundamental variables are reflected in the price action on a plain vanilla price chart. The primary reason that I believe this is because price action is the final result of all catalysts and participants in any financial market. Forex news and other fundamental variables are simply catalysts that cause markets to move, and since price action trading involves analyzing price bars on a “naked” price chart, I am primarily concerned with analyzing the end result of the news: price movement.

Now, there may be some diehard economists and fundamental traders who will disagree with what I am saying here. So, let me make myself clear, I am not saying that news cannot be used or that fundamental traders can’t make money in the markets. What I AM saying, is that the effectiveness and relevance of price action trading cannot be disputed. As price action traders we want to make our trading simple, and in order to simplify we remove the news, economists, and so-called market gurus. Let’s dissect this issue further…

Over-analyzing Forex fundamental variables…

Many traders over analyze the news and this ends up confusing them and causing them to second guess themselves. There are just too many variables each day as far as news and fundamentals are concerned for any individual trader to have enough time to make effective use out of them. You will literally burn your eyes out trying to read all the economic news that can influence the Forex market each day. The point being; you can bypass all of this unnecessary over-analyzing by learning to read a plain vanilla price chart. You see, fundamental news is simply a catalyst for price movement, so, it only makes sense that we trade based off the final result of all Forex and economic news; price action. We will discuss this more in-depth in the last part of this article.

Also, most retail traders do not have access to the type of “in-depth” and “inside” information that would allow them to take advantage of an impending news event. Furthermore, paying to get access to “up to the minute” economic news is basically a huge waste of money. It’s only going to introduce more variables for you to over-analyze and take your focus off the price action of the market.

Why trying to predict price movement based on the news is like gambling…

You cannot predict what the market will do based on the news. The market often reacts counter to what you would expect based on a particular news release because of the issue of “buying the rumor selling the fact”. Markets operate on traders’ / investors’ expectations of the future, so when a news event actually happens, price will often move in the opposite direction to what the implication of the news event might be. This is because traders have traded their expectations already, and so once the news is out there is nothing left to expect from that particular piece of news. The bottom line is that you never really know how the market will react to any particular news event, and trying to guess what the market will do based on some economic news release is not a definable or effective edge, it’s basically a blind gamble.

Once you learn how to identify and trade a handful of simple yet high-probability price action trading strategies, you will have an effective trading edge that you can use to achieve success in the markets over a period of time.

What you DO need to know about Forex news…

While we do not need to know everything about all the fundamental forces that cause price to move, it is good to know what the most volatile economic news releases are and when they are released. This is because if you are in a profitable trade, you do not want to lose that profit or have it turn into a loss because the market became “spooked” or surprised about a particular piece of news. We call this a “knee-jerk” reaction, and sometimes these reactions can be very quick and very significant. So, it’s good to know when the most volatile news releases are coming out so that if you are up with a risk reward of over 1:2, you can lock in that profit or you may simply want to move to breakeven. This is part of Forex trade management, and we need to be good managers of our trades because our number one goal is to protect our capital, and we don’t want winners turning into losers.

• What news events are most volatile?

The following economic news releases are generally the most important for any country. Depending on the current state of the economy, the relative importance of these releases may change; therefore, they are not in order of significance here (they are actually in alphabetical order). For example, unemployment may be more important this month than inflation or interest rate decisions.

1. Business sentiment surveys
2. Consumer confidence surveys
3. Gross Domestic Product (GDP)
4. Industrial production
5. Inflation (consumer price or producer price)
6. Interest rate decision
7. Manufacturing sector surveys
8. Retail sales
9. Trade balance
10. Employment / Unemployment (Non-Farm Payrolls)

As price action traders we only want to know that there is volatility coming, we don’t ever want or need to “guess” what will happen based on some piece of economic news. To learn more about these economic news events check out this article: Major Economics Events in Forex Trading, and to see the upcoming volatile news events for the next 24 hours, you can always check out my daily Forex market commentary, just scroll down to the bottom where it says “upcoming important economic announcements”.

My final thoughts on Forex news and fundamental variables…

Global economic variables are the catalysts that cause all financial markets to move. However, it is not the actual news events themselves that we should be concerned with, instead we need to be concerned with the final result of economic news events; price movement. The easiest and most effective way to trade the Forex market is by learning to take advantage of simple, effective, and repetitive price action patterns that form in the markets as the end result of these global economic price catalysts.

To become too concerned with Forex news and fundamental variables is not being able to see the forest for the trees. The “forest” of the Forex market can be seen by looking at a daily price chart; this shows you the most up to date and relevant picture of the market. You can easily get lost in this forest by spending too much time analyzing the “trees”, such as all the different news events that come out each day. If you want to learn how to profit consistently in the market, you need to know what you are looking for. Learning to trade with price action strategies can give you the edge you need, so that you know what you are looking for every single time you check your charts. Forex news has its place as a catalyst that causes price to move. But, if you don’t understand how to read the natural price action on a plain vanilla price chart, all the time-consuming fundamental analysis in the world will not mean a thing.

Article written by Nial Fuller @learntotradethemarket.com

Today’s article is going to give you guys a “sneak-peak” into exactly how I decide on my stop and profit target placements. I get a lot of emails asking how I decide where to place a stop or where to place a target, and while there is no one-size-fits all answer to this question, there are certain things that you should consider before entering a trade that will make determining the best stop and target placement much easier.

Before we get started, let me first say that this topic of stop loss and profit target placement is really a pretty broad topic that I could write quite a lot on. Whist today’s lesson doesn’t cover every detail of stop loss and target placement, it will give you a good general overview of the most important things that go through my mind as I decide where to place my stop loss and my profit target on any one trade.

Placing stop losses

I am starting with stop loss placement for a couple of important reasons. One, you always should think about risk before reward and you should be at least two times more focused on risk per trade than you are on reward. Two, we need to determine our stop loss to then determine our position size on the trade, potential dollar loss and gain, and our R multiples. This will all become clearer as you read on if you were confused by that last sentence.

General stop loss placement theory:

When placing stops, we want to place our stop loss at a logical level, that means a level that will both tell us when our trade signal is no longer valid and that makes sense in the context of the surrounding market structure.

I like to always start with the premise that I will ‘let the market take me out’, meaning, I want the market to show me that my trade is invalid by moving to a level that nullifies the setup or changes the near-term market bias. I always look at manually closing a trade as option number 2, my first option is always to ‘set and forget’ the trade and let the market do the ‘dirty work’ without my interference. The only time I manually exit a trade before my predetermined stop gets hit is if the market shows me some convincing price action against my position. This would be a logic-based reason to manually exit a trade, rather than an emotion-based reason that most traders use to exit on.

So to recap, there are basically two logic-based methods for exiting a trade:

1) Let the market hit your predetermined stop loss which you placed as you entered the trade.

2) Exit manually because the price action has formed a signal against your position.

Exits that are emotion-based:

1) Margin call because you didn’t use a stop and the market moved so far against your position that your broker automatically closed your trade.

2) Manually closing a trade because you ‘think’ the market is going to hit your stop loss. You feel emotional because the market is moving against your position. But, there is no price action based reason to manually exit.

The purpose of a stop loss is to help you stay in a trade until the trade setup and original near-term directional bias are no longer valid. The goal of a professional trader when placing their stop loss, is to place their stop at a level that both gives the trade room to move in their favor or room to ‘breathe’, but not unnecessarily so. Basically, when you are determining the best place to put your stop loss you want to think about the closest logical level that the market would have to hit to prove your trade signal wrong. So, we don’t want to put our stop loss unnecessarily far away, but we don’t want it to close to our entry point either. We want to give the market room to breathe but also keep our stop close enough so that we get taken out of the trade as soon as possible if the market doesn’t agree with our analysis. So, you can see there is a ‘fine line’ that we need to walk when determining stop placement, and indeed I consider stop placement one of the most important aspects of placing a trade and I give each stop loss placement a lot of time and thought before I pull the trigger.

Many traders cut themselves short by placing their stop loss too close to their entry point solely because they want to trade a bigger position size. This is what I call “trading account suicide” my friends. When you place your stop too close because you want to trade a bigger position size, you are basically nullifying your trading edge, because you need to place your stop loss based on your trading signal and the surrounding market conditions, not on how much money you want to make.

If you remember only one thing from today’s lesion, let it be this: always determine your stop loss placement before determining your position size, your stop loss placement should be determined by logic, not by greed. What that means, is that you shouldn’t purposely put a small stop loss on a trade just because you want to trade a big position size. May traders do this and it is basically like setting yourself up for a loss before the trade even starts.

Examples of placing a stop loss based on logic:

Now, let’s go through some examples of the most logical stop loss placements for some of my price action trading strategies. These stop placements are what I consider to be the ‘safest’ for the setups being discussed, that means they gave the trade the best chance of working out and that the market must move to a logical level against your position before stopping you out. Let’s take a look:

Pin bar trading strategy stop placement:

The most logical and safest place to put your stop loss on a pin bar setup is just beyond the high or low of the pin bar tail. So, in a downtrend like we see below, the stop loss would be just above the tail of the pin bar, when I say “just above” that can mean about 1 to 10 pips above the high of the pin bar tail. There are other pin bar stop loss placements discussed in my price action trading course but they are more advanced, the stop loss placement below is considered the ‘classic’ stop loss placement for a pin bar setup.



Inside bar trading strategy stop placement:

The most logical and safest place to put your stop loss on an inside bar trade setup is just beyond the mother bar high or low.



Counter-trend price action trade setup stop placement:

For a counter-trend trade setup, we want to place our stop just beyond the high or low made by the setup that signals a potential trend change. Look at the image below, we can see a downtrend was in place when we got a large bullish pin bar reversal signal. Naturally, we would want to place our stop loss just below the tail of that pin bar to make the market show us that we were wrong about a bottom being in place. This is the safest and most logical stop placement for this type of ‘bottom picking’ price action trade setup. For an uptrend reversal the stop would be placed just beyond the high of the counter-trend signal.



Trading range stop placement:

We often see high-probability price action setups forming at the boundary of a trading range. In situations like these, we always want to place our stop loss just above the trading range boundary or the high or low of the setup being traded…whichever is further out. For example, if we had a pin bar setup at the top of a trading range that was just slightly under the trading range resistance we would want to place our stop a little higher, just outside the resistance of the trading range, rather than just above the pin bar high. In the chart below, we didn’t have this issue; we had a nice large bearish pin bar protruding from the trading range resistance, so the best placement for the stop loss on that setup is obviously just above the pin bar high.



Stop placement in a trending market:

When a trending market pulls back or retraces to a level within the trend, we usually have two options. One is that we can place the stop loss just above the high or low of the pattern, as we have seen, or we can use the level and place our stop just beyond the level. We can see an example of this in the chart below with the fakey trading strategy protruding up past the resistance level in the downtrend. The most logical places for the stop would be just above the false-break high or just above the resistance level.



Trending market breakout play stop placement:

Often, in a trending market, we will see the market pause and consolidate in a sideways manner after the trend makes a strong move. These consolidation periods typically give rise to large breakouts in the direction of the trend, and these breakout trades can be very lucrative sometimes. There are basically two options for stop placement on a breakout trade with the trend. As we can see in the chart below, you can place your stop loss near the 50% level of the consolidation range or on the other side of the price action setup; in the example below it was a pin bar. The logic behind placing your stop loss near the 50% level of the consolidation range is that if the market comes all the way back down to that point the breakout is probably not very strong and likely to fail. This stop placement gives you a tighter stop distance which increases the potential risk reward on the trade.



Note on placing stops:

So, let’s say we have a price action trading strategy that’s very close to key level in the market. Ordinarily, the ideal stop placement for the price action setup is just above the high of the setup’s tail or the low of the setup’s tail, as we discussed above. However, since the price action setup tail high or low is very close to a key level in the market, logic would dictate that we make our stop loss a little bit larger and place it just beyond that key level, rather than at the high or low of the setup’s tail. This way, we make the market violate that key level before stopping us out, thus showing us that market sentiment has changed and that we should perhaps be looking for trades in the other direction. This is how you place your stops according to the market structure and logic, rather than from emotions like greed or fear.

Placing profit targets

Placing profit targets and exiting trades is perhaps the most technically and emotionally difficult aspect of trading. The trick is to exit a trade when you’re up a respectable profit, rather than waiting for the market to come crashing back against you and exiting out of fear. The difficulty of this is that it’s human nature to not want to exit a trade when it’s up a nice profit and moving in your favor, because it ‘feels’ like the trade will continue on in your favor and so you don’t’ want to exit at that point. The irony is that not exiting when the trade is significantly in your favor typically means you will make an emotional exit as the trade comes crashing back against your position. So, what you need to learn is that you have to take respectable profits of 1:2 risk:reward or greater when they are available, unless you have pre-determined before entering that you will try to let the trade run further.

General profit target placement theory:

After determining the most logical placement for our stop loss, our attention should then shift to finding a logical profit target placement and also to risk reward. We need to be sure a decent risk reward ratio is possible on a trade; otherwise it’s really not worth taking. Now, what I mean by that is this; you have to determine the most logical place for your stop loss, as we discussed above, and then determine the most logical place for your profit target. If after doing that, there is a decent risk reward ratio possible on the trade, it’s a trade that’s probably worth taking. However, you have to be honest with yourself here, don’t get into a game of ignoring key market levels or obvious obstacles that are in your way to achieving a decent risk reward just because you want to enter a trade.

So, what are some of the things I consider when deciding where to place my profit target? It’s really pretty simple, I am basically analyzing the overall market conditions and structure, things like support and resistance levels, major turning points in the market, bar highs and lows, etc. I try to determine if there is some key level that would make a logical profit target, or if there is some key level obstructing my trade’s path to making a decent profit.



Now, let’s take this a step further and put everything we’ve learned in today’s lesson together. We are going to analyze a trade setup and discuss the stop placement on the trade, the target placement and the risk reward potential…

In the chart below, we can see an obvious pin bar reversal setup formed near a key market resistance level, indicating that a move lower was a strong possibility. The first thing I did was determine where best to place my stop loss. In this case, I elected to place it just above the pin bar high since I determined that I would no longer want to be short if the market moves up to that level.

Next, I noticed that there’s a key support a little ways down below my entry, but since the key support didn’t come in until almost 1.5 times my risk and beyond that there was no key support until much further below, I decided the trade was worth taking. Given there was a chance of a reversal after the market hit that first key support level, I pre-determined to trail my stop down to that R1 level and lock in that profit, if the market reached that level. That way I can at least make 1R whilst avoiding the potential reversal off that key support.

As it turned out, the market sailed right through the first key support and then continued moving lower to make 3R. Now, not every trade is going to work out this well, but I am trying to show you how to properly place your stop loss, calculate what your 1R risk amount is and then find the potential reward multiples of that risk whilst considering the overall surrounding market structure. The key chart levels should be used as guides for our profit targets, and if you have a key chart level coming in before the trade can reach a 1R profit, then you might want to consider not taking that trade.



When we are trying to figure out if a potential price action trade setup is worth taking, we need to work backwards to some degree. We do this by first calculating the risk and then the reward and then we take a step back and objectively view the trading setup in the context of the market structure and decide whether or not the market has a real shot at hitting our desired target(s). It’s important to remember we are doing all of this analysis and preparation prior to entering our trade, when we are objective and unemotional.

Note: There are different entry possibilities that I didn’t get into here which can affect the potential risk reward of a particular trade setup. Today’s lesson was just meant as a general guide of how to logically and effectively place stop losses and targets on select price action trade setups, I discuss different entry scenarios and more trade setups in my trading course and members’ community.

Final note:

A trader is really a business person, and each trade is a business deal. Think about Donald Trump doing a big business deal to buy a new hotel development…he is carefully weighing the risk and the reward from the deal and deciding if it’s worth taking or not. As a trader, that’s what we do too; we first consider the risk on the trade and then we consider the potential reward, how we can obtain the reward, and if it’s realistically possible to obtain it given the surrounding market structure, and then we make our final decision about the trade. Whether you have a $100 account or a $100,000 account, the process of weighing the potential risk vs. the potential reward on a trade is exactly the same, and that also goes for stop and target placement; it’s the same no matter how big or small your account is.

Our number 1 concern as traders is capital preservation. That means getting the most ‘distance’ out of our trading capital. Professional traders do not waste their trading capital, they use it only when the risk reward profile of a trade setup makes sense and is logical. We always have to justify the risk we are taking on any one trade, that’s how you should think about every trade you take; justify the money you are laying on the line, and if you can’t make a good case for risking that money given the setup and market structure, then don’t take the trade. Each trade we take needs careful planning and consideration and we never want to rush to enter a trade because it’s far better to miss an opportunity than it is to jump to a conclusion that we came to emotionally rather than logically.

Article Written by Nial Fuller @learntotradethemarket.com