Something to read

Use Moving Averages to Spot Trend Changes

Veteran trader and newsletter editor Jim Rohrbach minces no words as he explains why fundamental and economic forecasts can lead investors astray—and why so few advisors use technicals. He explains how he uses some simple technical indicators to identify possible buy points in stocks.

Kate Stalter: Today I’m delighted to be speaking with someone who is a favorite of MoneyShow audiences, well known to many of you out there: James Rohrbach of Investment Models.

Jim, I thought maybe we could start out today with you telling us a little bit about your market timing methodology. Conventional wisdom has it that you can’t time the market, but as you and I have discussed, there are certainly ways to do it.

James Rohrbach: Well, that is an interesting subject in itself. I look at LinkedIn (LNKD) once in a while, and I see people who call themselves traders, and they have all kinds of ideas about how you have to look into the future in order to tell how to invest or trade.

Well, you can’t look into the future. If you can just identify when the trend changes, that’s all you need. Problem is, nobody knows how to do that.

I was invited to be a judge at a university here in Orlando, and we were judging four colleges of students who were in the finance end of study, and they had to come up with an analysis of a company, and then present it. I found it very interesting, and when they were speaking and I had a chance to interject, I asked the kids a couple of technical questions.

]Afterwards, the professor came over to me. He said, “Mr. Rohrbach, they were asked to identify and analyze the company on a fundamental basis, not a technical basis.”
I said, “I’m sorry, I didn’t know that.” But he said, “It was good, because you sort of stopped them in their tracks and we could observe how they got around that.”

But then I started thinking: Now, these kids are in four different universities learning finance, investing, and nobody’s teaching them technical analysis. And I know why.

Kate Stalter: Why’s that?

James Rohrbach: Because they don’t know how to teach it, and therefore they couldn’t grade it. Isn’t that interesting?

So we’re getting a part of an education when we go to college and we major in finance. And technical analysis is sort of a mystery to most people. They all talk in terms to convince you that they know something about technical analysis, but they really don’t. They don’t know how to identify a change in the trend in the market, and it’s not that difficult, if you spend the time to try to figure it out.

I’ve been doing it for 40 years. I’ve identified every change in the trend in the market, and I know that’s not believable, because most people don’t want to believe it, because they’re being told constantly by brokers, etc., “Don’t try to time the market…it can’t be done.”

It can’t be done because they can’t do it.

Kate Stalter: Jim, let me follow up with what is the obvious question, based on what you’ve said: How are you identifying shifts in market trends?

James Rohrbach: Well, I developed many years ago—in 1964, I came up with this problem. I said to myself, “If I’m going to be successful, I’ve got to know when the trend changes.”

And I spent seven years working on the mathematics of that thing. I kept stumbling, but I finally came up with a way where I can take certain ingredients, which I’m not going to tell you what they are, and if I applied them to the mathematics, I could tell on a daily basis what the trend of the market was for that day.

In other words, I’d convert the action of the market into a number. That number represents the trend for today. If the market is going up several days in a row, that number will go up, and vice versa.

But you’ve got to know the ingredients, and you’ve got to use mathematics. Don’t listen to those guys on the Street, or wherever, who tell you the reasons for the market going up or down, because they have nothing to do with reality.

It’s all a mathematical thing for me, and mathematics are unemotional, and they don’t need to know what’s going on in Europe. Or what the president said today about student loans. Oh my, we’ve got a big problem there.

China Stocks Rise for Third Day, Led by Banks, Technology

China’s stocks rose for a third day as lenders advanced after Industrial Bank Co. reported a jump in first-half profit and technology companies extended the biggest rally among industry groups this year.
Industrial Bank, part-owned by a unit of HSBC Holdings Plc, surged to a one-month high after net income increased 27 percent and Citic Securities Co. recommended the shares on easing concerns about the economy. Goertek Inc., a supplier to Apple Inc. jumped to a record high. Tasly Pharmaceutical Group Co. led declines for health-care companies with a 1.2 percent retreat.

The Shanghai Composite Index advanced 0.2 percent to 2,106.16 at the close. The gauge jumped 2.4 percent yesterday to a two-month high after new yuan loans topped estimates in July and money supply unexpectedly accelerated. Data earlier last week showed industrial output and exports improved. The Shanghai index is still down 7.2 percent in 2013.
“Decent economic data helped spur the recent rally,” said Wang Zheng, Shanghai-based chief investment officer at Jingxi Investment Management Co., which manages $120 million. “But concern remains over the sustainability of the rebound in the economy. Gains in stocks may not last long.”
The CSI 300 Index advanced 0.3 percent to 2,359.07. The Hang Seng China Enterprises Index surged 2.4 percent.

Trading volumes in the Shanghai Composite were 22 percent higher than the 30-day average, while 50-day volatility was at 23.6 after yesterday reaching the highest level since January 2011. The index is valued at 8.5 times 12-month projected earnings, compared with the five-year average of 12.7 times, data compiled by Bloomberg show.

Banks Advance

Chinese stocks are attractive as the risk of a sudden slump in the world’s second-biggest economy is receding and valuations trail other markets, according to Baring Asset Management Ltd.

“China’s overall market is stabilizing, relieving concerns regarding the hard landing scenario for the rest of this year,” said Agnes Deng, head of Hong Kong and China equities at Baring, which manages $57.4 billion globally. “China stocks’ valuation is quite cheap and attractive.”

Industrial Bank rose 4.5 percent to 10.32 yuan after saying first-half net income increased to 21.6 billion yuan from a year earlier. Banking stocks may rise 20 percent as concerns about economic growth and financial risks ease, analysts led by Zhu Yan at Citic Securities wrote in a report today.
The brokerage recommended Industrial Bank, China Minsheng Banking Corp. and Bank of Beijing Co. Minsheng Banking rose 1.8 percent to 9.05 yuan, while Bank of Beijing added 0.5 percent to 7.69 yuan.

Technology Rally

The technology gauge rose the most among 10 industry groups on the CSI 300, bringing its gain this year to 41 percent. Goertek surged 5.9 percent to 44.55 yuan. Apple, which jumped 2.8 percent yesterday, will unveil a new iPhone at a Sept. 10 event, according to a person familiar with the plans.

Anhui Conch Cement Co., the nation’s biggest cement producer, gained 2.3 percent to 16.61 yuan. Gansu Qilianshan Cement Group Co. added 3.1 percent to 7.58 yuan. China’s average cement price increased 0.85 percent last week, while output rose 9.1 percent in July from a year ago, China Merchants Securities Co. said in a report yesterday.

Angang Steel Co. advanced 3.6 percent to 3.19 yuan. Hebei Iron & Steel Co., the listed unit of China’s biggest steelmaker, gained 1 percent to 1.95 yuan. Steel prices have rebounded recently on rising demand, Changjiang Securities Co. said in a report dated yesterday.
A measure of health-care shares retreated 0.5 percent. Tasly Pharmaceutical fell 1.2 percent to 44.30 yuan, paring its 2013 gain to 60 percent.

Slower Chinese Economic Growth 'The New Reality' - BMO Research

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China’s slowing economic growth is “the new reality” for the Asian nation, and that will affect commodity consumption, said BMO Research on Tuesday.

The firm, which said that it recently completed a two-week research trip to China, noted that most analysts now forecast 7.5% gross domestic product growth for 2013.

“Thus, a substantial rebound near term is unlikely, especially one driven by massive government spending,” they said. Rather the government is likely to offer targeted spending for certain regions or sectors.

“These announcements should, therefore, not be viewed as significant changes to the government’s general policy though commodity prices are nonetheless likely to move as headlines emerge on various ‘mini-stimuli’,” they said.

BMO forecasts global commodities demand growth to slow materially over the medium term and for commodity prices to remain under some pressure near term on the anticipation of oversupplied markets.

The firm left its price forecasts unchanged and noted that copper remains a preferred commodity for investors, “albeit within a challenged commodity complex.” In July, they forecast 2013 average copper prices at $3.30 a pound. BMO Research forecast Tuesday China’s copper consumption growth at 4% and mine supply growth at 7% in 2013.

They remain cautious on the aluminum, citing “severe overcapacity and very high inventory levels globally.” BMO said while some analysts forecast a surplus market this year despite 2 million metric tons of supply cuts, they project a slight deficit to balanced market. Their 2013 average aluminum price forecast is 84 cents a pound, first announced in July.

Financial and fiscal reforms appear to be current top priorities, followed by environmental, land and social security reform, they said in Tuesday’s note.


Attachment 2442

The Week Ahead: A Contrary Bet For 2014

It was a rough week for the exchanges as the three-hour halt in Nasdaq trading on Thursday was unprecedented. There was no comment from the Nasdaq until well after the close. On Friday, their response also seemed to be lacking, looks like they must be using the same damage control experts as Carnival Cruise.


Even more disturbing from my perspective was the glitch in Goldman Sachs (GS) options software on Tuesday that mis-priced over 800,000 options at $1 each. If the regulatory authorities decide to bust these trades and protect Goldman, I feel it will be very discouraging to the individual investor.


I agree with Myron Scholes, co-creator of the Black-Scholes option pricing formula, who told the Financial Times that Goldman should pay for their mistake.


The actions of the big institutional traders and research departments can often provide some useful insight. Sometimes, but not always, it is a good idea to do the opposite of what they are doing or recommending.


Attachment 2514

There has been quite a bit of commentary recently on the dismal performance of the emerging markets and the sharp declines in their currencies. Both the Indian and Turkish currencies have plunged in the past few weeks with the Brazilian real hitting a new four-year low.

The chart above shows the performance of five emerging markets in 2013. The iShares MSCI Brazil (EWZ) is down close to 27%, so far this year, with the iShares MSCI Turkey Investable Market (TUR), down over 24%. Another big loser was the PowerShares India (PIN), down almost 21%.


The Market Vectors Indonesia Index (IDX) is not far behind the others as it has lost well over 19%. This makes the Market Vectors Vietnam ETF (VNM) look pretty good as it is down just under 6% and was one of the most recommended markets early this year.

The flow of funds out of the emerging markets has also increased sharply as in June retail investors pulled $18.1 billion out of the emerging markets. This was over 30% of what they had put in since the financial crisis.

Attachment 2515


I think it is even more significant that the institutions have also been moving money out of emerging market stocks and bonds. As the chart indicates, they were buying pretty heavily in January and February, so I imagine they had some sizable losses. The mixed data out of China has not helped the sentiment and negative stories about their real estate development has scared some investors.


Still, there are quite a few value advisors who see the valuations of the emerging market stocks to be quite attractive. It is my view that continued improvement in both the US and Eurozone economies will eventually spill over to the emerging markets. In Friday’s column, I took a look a three of the largest mining companies, which have also dropped sharply this year. If the emerging markets come back, these stocks should also eventually turn around.


My favorite emerging market ETF is Vanguard FTSE Emerging Markets ETF (VWO), which has roughly 38% in Asian merging markets, followed by 21% in Latin America, and then 18.5% in developed Asian markets. It has a total of 1,037 holdings in a recent report and a low expense ratio of 0.18%

Attachment 2516


The long-term chart shows that the important 50% support level at $34.71 was briefly violated in October of 2011 when the low was $34.21. In July, VWO formed a doji so a monthly close above the doji high at $40.53 in either August, September, or October will trigger an HCD buy signal.


The monthly OBV needs to break through its downtrend, line a, to generate a major buy signal. Currently the weekly and daily technical studies are both still negative. In the final section of today’s column, I will detail a dollar cost averaging strategy for this ETF. There are several firms, which allow the purchase, but not trading of this ETF, without commission. A 5-10% position in this ETF could pay off well in 2014.

The news out of the Eurozone continues to improve as their Purchasing Managers Index rose to 51.7 in August consistent with an expanding economy. The chart shows a nice trend here suggesting that the worst by indeed be over. A deeper pullback in some of the euro ETFs like SPDR Euro STOXX 50 ETF (FEZ) should create a buying opportunity.


Attachment 2517

The US economic data continues to show improvement despite the prior week’s unexpected drop in consumer confidence. The Existing Home Sales jumped sharply, and while the Flash PMI reading was up only slightly, it still shows a positive trend. The Leading Economic Indicators (LEI) from the Conference Board’s Leading Indicators also improved and is in a clear uptrend as I have pointed out previously.

Last Friday’s New Home Sales dampened the rosy outlook somewhat as they were sharply lower, and the prior two months were also revised downward. This hit the homebuilders hard as some were down 2-3%. I reviewed the homebuilders in a recent report When Will the Homebuilders Turn Around? and some are now getting closer to more important support levels.
On Monday, we get the Durable Goods report and the Dallas Fed Manufacturing survey. We get another look at the consumer, Tuesday, with the Consumer Confidence, and also the S&P Case-Shiller Housing Price Index. This will set the stage for the Pending Home Sales Index on Wednesday.
In addition to the jobless claims on Thursday, we get the latest GDP reading. On Friday, the Chicago PMI is released, along with the University of Michigan’s and the final August reading on Consumer Sentiment.

What to Watch

The deterioration in the technical studies that have been developing since early August led to some meaningful selling over the past two weeks. Once again, the major averages closed well above the week’s lows as all except the Dow were higher.

From the high in early August to Wednesday‘s low, the Spyder Trust (SPY) has corrected just under 4%. The prevailing wisdom seems to be that a 5% market correction will be a buying opportunity as the market rallies into the end of the year. However, the consensus view is rarely correct.

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Market's Strange Brew: 'From Lady Gaga To Ballmer' (And Other Quotes Of The Week)

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It was a particularly odd week for the markets. And for that matter, news flow in general.
We’re talking seriously weird stuff–“Ginger Baker meets John McAfee meets Lady Gaga weird.”

But, then again, since when do markets do what you expect them to? Or headlines be anything but unpredictable?

Let’s parse some of the events and quotes of this unusual week, starting with the performance of the market indices.

“Divergent” is hardly the word for it, with the Dow moving down -0.5% on the week and the NASDAQ Composite posting a +1.5% gain. The S&P somehow found the middle ground, +0.5%.

But what made this strange was the NASDAQ market leadership for the week in the face of Thursday’s three-hour “technical glitch” which put the exchange in the dark. The event, according to USA Today, “had the potential to spark panic and a dive in stock prices.” This obviously did not occur, but many market analysts and participants were critical of NASDAQ OMX head Robert Greifeld’s downplaying of the incident and lack of communication as the event unfolded.

Arthur Levitt, the former chairman of the Securities and Exchange Commission, told reporters, “The worst part of all of this is the lack of disclosure. The lack of transparency. This is inexcusable.” (The Guardian)
Greifeld’s most replayed sound bite: “I think where we have to get better is what I call defensive driving.” (CNBC)

Against this backdrop, the Dow managed to record its weekly loss despite Microsoft’s (MSFT) big gain on Friday, +7.3%, which came on the back of Steve Ballmer’s “stepping down” announcement (but more on that later).

Schaeffer’s Research provided some historical perspective on the Dow’s action this week:

Quote:

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It was a rather historic week on Wall Street, with the Dow Jones Industrial Average (DJI) enduring its first four-session losing streak of the year. The last time the blue-chip barometer lasted this far into the year without such a streak was 1954.

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The previous week’s market drop, combined with a Fed-inspired inauspicious start to this week, led to a “spiking” VIX and some fast runs for the exits, before things calmed later in the week.

Barron’s noted some very nervous ETF outflows:

Quote:

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Last week, individuals pulled $12.3 billion out of equity exchange-traded funds, the first outflow in eight weeks and the largest in five years, according to a report Friday from Bank of America Merrill Lynch chief investment strategist Michael Hartnett.

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But the “professionals” appeared equally nervous, and the latest figures from the National Association of Active Investment Managers (NAAIM) showed a weekly drop in sentiment/equity exposure from 69.85 to 34.76 (as of 8/21). Schaeffer’s called this “the biggest drop since January 2008.”

Pros and amateurs alike were spooked partially by the potential of market-unsettling Fed minutes, which indeed delivered a wild ride on Wednesday, with a loss of over 100 Dow points, followed by a 100+ point move back up, and then roundtrip back down. This took the VIX to a peak Wednesday around 16.5, the highest level seen since early July.

But in the final analysis, most observers were calling the Fed minutes a “non-event,” as Bernanke and team offered little real news and it seemed the biggest concern was that “markets not freak out.” (Bloomberg)

Forbes said the minutes “indicated general support to start slowing asset purchases this fall, but also left plenty of room for guesswork by investors and market watchers.” And the language was perfectly muddled, as Reuters noted, offering few real “clues as to potential timing”:

Quote:

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A few on the economy before deciding on any changes to the pace of asset purchases,’ the minutes said. ‘At the same time, a few others pointed to the contingent plan that had been articulated on behalf of the committee the previous month, and suggested that it might soon be time to slow somewhat the pace of purchases as outlined in that plan.

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Let’s take a quick look at some of the other events and newsmakers this week.
–Surprisingly, Apple (AAPL) did not lead the NASDAQ’s charge higher this week (finishing about flat at $501.02), despite Carl Icahn’s continuing one-man “tweet fest” and belief that “Apple’s shares could be trading at $700.” (Forbes) Adding to last week’s remarks, Icahn tweeted Thursday:

Quote:

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@Carl_C_Icahn Spoke to Tim. Planning dinner in September. Tim believes in buyback and is doing one. What will be discussed is magnitude.

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–“Wild and Crazy” Steve Ballmer (CNET) announced he would be stepping down at Microsoft within the next 12 months, a statement apparently greeted with some delight by investors. Ballmer said, “There is never a perfect time for this type of transition, but now is the right time.” (LA Times)

The beta version of MetaTrader 4 IDE, including a new compiler and editor of MQL4

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Start of the topic:

• What is new in MetaTrader 4 and MQL4 - big changes on the way (the forum MQL4)
• An interesting topic for many, what is new in MetaTrader 4 and MQL4 - big changes on the way (the forum MQL5)

Below attached beta IDE, uniform for MetaTrader 4/MQL4 and MetaTrader 5/MQL5. This is a preliminary version for public inspection.


What are the differences from the old version of MQL4:

• Changed the priority of logical operations AND / OR. Now, just like in the classic C / C + +
  
• Introduced a shortened evaluation of logical expressions. Now, in case of early computing logical expression remaining sub-expressions are not evaluated. As in C / C + +.
  
• In a switch statement is now used only integer values. Previously, you could use a real
  
• Now you can not use a dot in their names. Also, variable names can not use the '@', '$', '?'
  
• Tightened requirements for the function start. Earlier in start you can specify parameters. Now all the entry points init, start, deinit, OnInit, OnStart, OnTick, OnTimer, and so on. must exactly match their signatures
  
• In connection with the expansion of keywords is now impossible to use names like short, long, float, const, virtual, input, delete, new, do, char
  
• Now imported dll-functions can not take as a parameter an array of strings. As in MQL5
  
  
• Now there are pre-defined variable names _Period, _Symbol, _LastError, _CriticalError, _StopFlag, _Point, _Digits, _UninitReason, _RandomSeed, which may be in conflict with simple variables declared in the current source code under the same name
• Datetime, was 8-byte in MQL5.

The differences are not fatal and is easily corrected in the code. Instead, many opportunities are available MQL5, speed of execution and much more rigid quality control.


We plan to conduct public testing within the next month to collect as many responses and prepare for the development.
Discussion on the MQL4 forum: ???? ?????? MetaTrader 4 IDE, ?????????? ? ???? ????? ?????????? MQL4 ? ???????? - MQL4 ?????

Gold surges 2%, enters bull market on Comex

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SAN FRANCISCO (MarketWatch) — Gold futures finished 2% higher on Tuesday, moving into a bull market as charted by the Comex contracts, as fears over possible U.S. military action against Syria and concerns over the U.S. debt ceiling drew investors into the perceived safety of the precious metal.


Gold for December delivery GCZ3 +0.38% jumped $27.10, or 2%, to settle at $1,420.20 an ounce on the Comex division of the New York Mercantile Exchange. Intraday it hit as high as $1,424. Prices closed at their highest since mid-May, according to FactSet data, based on the most-active contracts. Gold on Monday lost 0.2%,

Attachment 2571


“Gold will be a beneficiary of any military action in Syria,” said Paul Herber, portfolio manager of the Forward Commodity Long/Short Strategy Fund FCOMX +0.15% .


For now, “investors are selling equities and moving into safer assets ... of which gold is one,” he said, pointing out that oil and U.S. Treasurys also rallied.


Gold is now at least 20% above the intraday lows hit by Comex gold futures of around $1,180 reached June 28, officially putting it into a bull market.


It’s still got a ways to go by another gold pricing. The lowest official price recently was the London P.M. gold fix at $1,192 an ounce on June 28 of this year, according to Edmund Moy, chief strategist at gold-backed IRA provider Morgan Gold. The gold price is “fixed” by five members of The London Gold Market Fixing Ltd. twice each day, in the morning and late afternoon, London time.

So to be in a bull market, gold prices would have to be $1,430.40, Moy said.

Technically, a bull market definition is a rise in value of any market by at least 20%, while a bear market works in the opposite direction. Gold prices, however, are still down more than 15% this year.


Silver, which is typically much more volatile than gold because of the much-smaller size of its market than gold, saw a bigger percentage gain Tuesday. September silver SIU3 +0.58% rose 64 cents, or 2.7%, to end at $24.65 an ounce, the highest close for a most-active contract since mid-April, FactSet data show.

Bullish factors

“Among the factors for the gains in gold is the threat to Middle East stability as a result of the U.S. increasing tensions with Syria,” said Michael Haynes, chief executive officer at online precious-metals dealer APMEX Inc.


There’s also the “rhetoric around the increase in the debt ceiling and the implied threat that this debate will erupt into,” he said. On Monday, Treasury Secretary Jacob Lew said the U.S. government will hit the debt ceiling and be unable to borrow money to pay its bills in the middle of October unless Congress votes to increase the federal debt ceiling.


“The gold markets appear to be looking for reasons to go higher and we have these ‘ignition points’ at the moment,” said Haynes. “As we move past the Syrian threat and into the U.S. debt/budget discussion in September, which has longer term impact, the call on the bull market will be more evident.”


Gold had climbed in electronic trading late Monday after U.S. Secretary of State John Kerry said the U.S. will hold the Syrian government accountable for its “undeniable” use of chemical weapons against civilians in rebel-held areas outside of Damascus last week.

Bloomberg News Enlarge Image Gold futures jump above $1,400 an ounce. The Federal Reserve, meanwhile, remained in the backdrop for the gold market. The U.S. central bank has said improvement in the economy should lead it to reducing asset purchases from their current pace of $85 billion a month, but soft data has kept alive debate about the timing and the amount of tapering.


Gold prices have been considered to be among the beneficiaries of stimulus from the Fed as well as from other central banks.

Economic data Tuesday was mixed. The U.S. consumer confidence index rose slightly in August to 81.5 from 80.0 in July. U.S. home prices increased 2.2% in June, another month of fast growth but slower than May, according to the S&P/Case-Shiller gauge.

A look ahead

In additional to the regular economic indicators, there are several key events that will impact gold prices, said Morgan Gold’s Moy.

“The federal government runs out of credit sometime in October, which will force a federal debt ceiling confrontation between President Obama, who doesn’t want to negotiate, and the Republicans, who may use this to push for additional cuts and defund Obamacare,” he said.


“This will coincide with the end of the federal government’s fiscal year (September 30), of which Congress will struggle with either passing another continuing resolution or its first budget in five years,” he said. “And if there are no significant budget cuts, a second round of sequestration cuts begins on January 1, 2014.


Finally, Fed Chairman Ben Bernanke’s term ends on January 31, 2014 and before the end of the year, “Obama’s choice will face a very public and possibly contentious nomination hearing,” said Moy. “Hold on tight. It should be a wild ride this fall.”

For now, in another sign that investors are moving back into gold, Barclays on Monday said exchange-traded products recorded their biggest daily inflow since Jan. 1 on Friday at 5.8 metric tons. Holdings of SPDR Gold Trust GLD +0.15% rose by 6.6 metric tons.

On Tuesday afternoon, shares of the gold-backed exchange-traded fund climbed 0.9%. Shares of metals miners turned lower, tracking broad losses among equities, with the Philadelphia Gold and Silver Index XAU -4.41% losing 1.7%.

September copper HGU3 -0.50% rose just under a penny to $3.33 a pound.


October platinum PLV3 +0.18% bucked the upbeat trend among metals futures to fall back by $12.40, or 0.8%, to $1,532.10 an ounce while September palladium PAU3 -0.47% closed higher by $3.10, or 0.4%, at $749.15 an ounce.

How Leverage Is Used In Forex Trading

“Leverage” in general terms simply means borrowed funds. Leverage is widely used not just to acquire physical assets like real estate or automobiles, but also to trade financial assets such as equities and foreign exchange (“forex”).

Forex trading by retail investors has grown by leaps and bounds in recent years, thanks to the proliferation of online trading platforms and the availability of cheap credit. The use of leverage in trading is often likened to a double-edged sword, since it magnifies gains and losses. This is more so in the case of forex trading, where high degrees of leverage are the norm. The examples in the next section illustrate how leverage magnifies returns for both profitable and unprofitable trades.

Examples of Forex Leverage
Let’s assume that you are an investor based in the U.S. and have an account with an online forex broker. Your broker provides you the maximum leverage permissible in the U.S. on major currency pairs of 50:1, which means that for every dollar you put up, you can trade $50 of a major currency. You put up $5,000 as margin, which is the collateral or equity in your trading account. This implies that you can put on a maximum of $250,000 ($5,000 x 50) in currency trading positions initially. This amount will obviously fluctuate depending on the profits or losses that you generate from trading. (To keep things simple, we ignore commissions, interest and other charges in these examples.)

Example 1: Long USD / Short Euro. Trade amount = EUR 100,000
Assume you initiated the above trade when the exchange rate was EUR 1 = USD 1.3600 (EUR/USD = 1.36), as you are bearish on the European currency and expect it to decline in the near term.

Leverage: Your leverage in this trade is just over 27:1 (USD 136,000 / USD 5,000 = 27.2, to be exact).

Pip Value: Since the euro is quoted to four places after the decimal, each “pip” or basis point move in the euro is equal to 1 / 100^th of 1% or 0.01% of the amount traded of the base currency. The value of each pip is expressed in USD, since this is the counter currency or quote currency. In this case, based on the currency amount traded of EUR 100,000, each pip is worth USD 10. (If the amount traded was EUR 1 million versus the USD, each pip would be worth USD 100.)

Stop-loss: As you are testing the waters with regard to forex trading, you set a tight stop-loss of 50 pips on your long USD / short EUR position. This means that if the stop-loss is triggered, your maximum loss is USD 500.

Profit / Loss: Fortunately, you have beginner’s luck and the euro falls to a level of EUR 1 = USD 1.3400 within a couple of days after you initiated the trade. You close out the position for a profit of 200 pips (1.3600 – 1.3400), which translates to USD 2,000 (200 pips x USD 10 per pip).

Forex Math: In conventional terms, you sold short EUR 100,000 and received USD 136,000 in your opening trade. When you closed the trade, you bought back the euros you had shorted at a cheaper rate of 1.3400, paying USD 134,000 for EUR 100,000. The difference of USD 2,000 represents your gross profit.



Effect of Leverage: By using leverage, you were able to generate a 40% return on your initial investment of USD 5,000. What if you had only traded the USD 5,000 without using any leverage? In that case, you would only have shorted the euro equivalent of USD 5,000 or EUR 3,676.47 (USD 5,000 / 1.3600). The significantly smaller amount of this transaction means that each pip is only worth USD 0.36764. Closing the short euro position at 1.3400 would have therefore resulted in a gross profit of USD 73.53 (200 pips x USD 0.36764 per pip). Using leverage thus magnified your returns by exactly 27.2 times (USD 2,000 / USD 73.53), or the amount of leverage used in the trade.

Example 2: Short USD / Long Japanese Yen. Trade amount = USD 200,000
The 40% gain on your first leveraged forex trade has made you eager to do some more trading. You turn your attention to the Japanese yen (JPY), which is trading at 85 to the USD (USD/JPY = 85). You expect the yen to strengthen versus the USD, so you initiate a short USD / long yen position in the amount of USD 200,000. The success of your first trade has made you willing to trade a larger amount, since you now have USD 7,000 as margin in your account. While this is substantially larger than your first trade, you take comfort from the fact that you are still well within the maximum amount you could trade (based on 50:1 leverage) of USD 350,000.

Leverage: Your leverage ratio for this trade is 28.57 (USD 200,000 / USD 7,000).

Pip Value: The yen is quoted to two places after the decimal, so each pip in this trade is worth 1% of the base currency amount expressed in the quote currency, or 2,000 yen.

Stop-loss: You set a stop-loss on this trade at a level of JPY 87 to the USD, since the yen is quite volatile and you do not want your position to be stopped out by random noise.

Remember, you are long yen and short USD, so you ideally want the yen to appreciate versus the USD, which means that you could close out your short USD position with fewer yen and pocket the difference. But if your stop-loss is triggered, your loss would be substantial: 200 pips x 2,000 yen per pip = JPY 400,000 / 87 = USD 4,597.70.

Profit / Loss: Unfortunately, reports of a new stimulus package unveiled by the Japanese government leads to a swift weakening of the yen, and your stop-loss is triggered a day after you put on the long JPY trade. Your loss in this case is USD 4,597.70 as explained earlier.

Forex Math: In conventional terms, the math looks like this:
Opening position: Short USD 200,000 @ USD 1 = JPY 85, i.e. + JPY 17 million
Closing position: Triggering of stop-loss results in USD 200,000 short position covered @ USD 1 = JPY 87, i.e. – JPY 17.4 million
The difference of JPY 400,000 is your net loss, which at an exchange rate of 87, works out to USD 4,597.70.

Effect of Leverage: In this instance, using leverage magnified your loss, which amounts to about 65.7% of your total margin of USD 7,000. What if you had only shorted USD 7,000 versus the yen (@ USD1 = JPY 85) without using any leverage? The smaller amount of this transaction means that each pip is only worth JPY 70. The stop-loss triggered at 87 would have resulted in a loss of JPY 14,000 (200 pips x JPY 70 per pip). Using leverage thus magnified your loss by exactly 28.57 times (JPY 400,000 / JPY 14,000), or the amount of leverage used in the trade.

Tips When Using Leverage
While the prospect of generating big profits without putting down too much of your own money may be a tempting one, always keep in mind that an excessively high degree of leverage could result in you losing your shirt and much more. A few safety precautions used by professional traders may help mitigate the inherent risks of leveraged forex trading:

• Cap Your Losses: If you hope to take big profits someday, you must first learn how to keep your losses small. Cap your losses to within manageable limits before they get out of hand and drastically erode your equity.

• Use Strategic Stops: Strategic stops are of utmost importance in the around-the-clock forex market, where you can go to bed and wake up the next day to discover that your position has been adversely affected by a move of a couple hundred pips. Stops can be used not just to ensure that losses are capped, but also to protect profits.

• Don’t Get In Over Your Head: Do not try to get out from a losing position by doubling down or averaging down on it. The biggest trading losses have occurred because a rogue trader stuck to his guns and kept adding to a losing position until it became so large, it had to be unwound at a catastrophic loss. The trader’s view may eventually have been right, but it was generally too late to redeem the situation. It's far better to cut your losses and keep your account alive to trade another day, than to be left hoping for an unlikely miracle that will reverse a huge loss.

• Use Leverage Appropriate to Your Comfort Level: Using 50:1 leverage means that a 2% adverse move could wipe out all your equity or margin. If you are a relatively cautious investor or trader, use a lower level of leverage that you are comfortable with, perhaps 5:1 or 10:1.

Conclusion
While the high degree of leverage inherent in forex trading magnifies returns and risks, using a few safety precautions used by professional traders may help mitigate these risks.

Crude oil futures - Weekly outlook: September 2 - 6

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New York-traded crude oil futures fell more than 1% on Friday, giving back some of the week’s strong gains amid fading expectations for imminent U.S. military action against Syria.

On the New York Mercantile Exchange, light sweet crude futures for delivery in October fell 1.05% Friday to settle the week at USD107.66 a barrel by close of trade. The October contract settled 1.2% lower at USD108.80 a barrel on Thursday.

Oil futures were likely to find support at USD105.58 a barrel, the low from August 26 and resistance at USD110.03 a barrel, the high from August 29.

Despite Thursday’s and Friday’s sharp losses, Nymex oil futures still ended the week with a 1.2% gain.

U.S. Secretary of State John Kerry said Friday that the U. S. would punish Syrian President Bashar al-Assad for a "brutal and flagrant" chemical weapons attack that killed nearly 1,500 people in Damascus.

However, President Barack Obama said late Friday that no decision on such a move has been taken.

On Thursday, the U.K. Parliament voted to not participate in military strikes on Syria. Germany also said it wouldn't join a strike.

Oil prices surged to a 27-month high of USD112.22 a barrel on Wednesday, amid growing speculation the U.S. was moving closer to taking military action against Syria’s government.

While Syria is not a major oil producer, investors fear that the two-year-old civil war could spill over to affect oil supplies in nearby countries.

Market players are also concerned about the involvement of Iran, OPEC’s sixth-biggest oil producer.

Meanwhile, a broadly stronger U.S. dollar also weighed after mostly upbeat U.S. economic data fuelled speculation the Federal Reserve will begin to taper its bond-buying program at its next policy meeting.

The dollar index, which tracks the performance of the greenback against a basket of six other major currencies, gained 0.12% on Friday to end the week at 82.11, the strongest level since August 2.

Dollar-denominated oil futures contracts tend to fall when the dollar gains, as this makes oil more expensive for buyers in other currencies.

The Thomson Reuters/University of Michigan revised consumer sentiment index for August released Friday rose to 82.0 from a preliminary reading 80.0, beating expectations for an uptick to 80.5.

Also in the U.S., a widely-watched Chicago purchasing managers' index rose to 53.0 this month from 52.3 in July, in line with expectations.

The data came one day after a government report showed that U.S. second quarter growth was revised sharply higher, indicating that the economic recovery is on track.

The Commerce Department said gross domestic product expanded at an annual rate of 2.5% in the three months to June, above expectations for growth of 2.2% and up from a preliminary estimate of 1.7%.

The upbeat data added to speculation the Fed could taper down its bond purchases at its next policy meeting amid increasing signs of a recovery in the U.S. economy.

The Fed’s stimulus program is viewed by many investors as a key driver in boosting the price of commodities as it tends to depress the value of the dollar.

In the week ahead, investors will be closely watching Friday’s key U.S. nonfarm payrolls report.

Oil traders have closely been looking out for U.S. data reports recently to gauge if they will strengthen or weaken the case for the Fed to reduce its bond purchases.

Any improvement in the U.S. economy was likely to reinforce the view that the central bank will begin to taper its bond purchase program in the coming months.

The central bank is scheduled to meet September 17-18 to review the economy and assess policy.

Elsewhere, on the ICE Futures Exchange in London, Brent oil futures for October delivery dropped 1% on Friday to settle the week at USD114.04 a barrel.

Despite Friday’s losses, the London-traded Brent contract rallied 2.6% over the week, while the spread between the Brent and the crude contracts stood at USD6.38 a barrel by close of trade on Friday.

Brent prices hit USD117.32 a barrel on Wednesday, the highest level since February 20.

French lender Societe Generale said Brent prices may rise to as high as USD150 a barrel if conflict disrupts supply from the Middle East and North Africa.

Countries in the Middle East and North Africa were responsible for 36% of global oil production and held 52% of proved reserves in 2012.

Impact of war on stocks and oil


Attachment 2641

The threat of U.S. military action in Syria has put pressure on stock prices and sent oil higher. But if history holds, the actual start of an intervention would quickly reverse those moves.

"It's not that it's welcome, but once it gets underway, you can quantify what the situation might look like," said Mark Luschini, chief investment strategist for Janney Montgomery. "When you're left in the dark about when it will start, what will be the result, it gives investors trepidation."

U.S. stocks fell 2% last week after Secretary of State John Kerry said last Monday that it was "undeniable" that Syria had used chemical weapons. Oil climbed 2%.

Syria has very little oil exports. But the concern in world markets is that U.S. military action there could spark a broader Middle East conflict.

Here was the impact on financial markets in past Middle East conflicts.

1991: Operation Desert Storm

In the two weeks leading up to Congressional authorization of Operation Desert Storm in early 1991, the S&P 500 index fell nearly 5% and oil jumped 12.5%.
One of the largest one-day drops in oil prices occurred on Jan. 17, 1991, the day after the United States launched an air campaign in Iraq. On that day, prices plunged 33% and the S&P 500 gained 3.7%

2003: The Iraq war

Oil prices rose steadily in the three months before fighting in Iraq began on March 19, 2003.

Oil climbed nearly 40%, from $18 a barrel in early December to $25 on March 18. The S&P fell 11% during the same period.

Oil plunged 24% and the S&P rebounded 8% in the week after President Bush issued his final ultimatum to Saddam Hussein on March 16.

2011: Libya

The pattern held in the month before the U.S. intervention in the Libyan civil war on March 19, 2011: Stocks fell 5% and oil climbed 12%.

Stocks rebounded after the fighting started, rising 1.5% the first day of trading after military action began, and up 4% by the end of the month.

In this case oil prices continued to rise in the first weeks of military action, but they reached a peak a month after the start of U.S. action. But they then started falling steadily, declining 24% by the time rebel forces gained control of the country four months later.