Ask a Market Maker Q&A on Currency trading… 6/27/15

An interview with Elliot Mayerhoff Market Maker and Mark Coe

A Risk disclaimer for currency trading with leverage:  Consider the risks associated with increasing your leverage. A relatively small market movement will have a proportionately larger impact on the funds you have deposited or will have to deposit; this may work against you as well as for you. You may sustain a total loss of initial margin and you may be required to deposit additional funds to cover a short margin position.

Do Market Makers gun for stops?
Buy or sell orders with stops go into effect after the stop level price is crossed. This is how stops are used – Market Makers (MMs) are able to see these stops and also have a good idea where traders place stops. The concept in the retail trader’s world is that Market Makers (MMs) gun for stops. This is particularly prevalent in the Forex currency trading world. There is a bid and an offer. Professionals and larger buyers will say to buy it at bid or do the best you can. MMs in the big banks are not too concerned about going after the retail traders specific stops. That does not mean the MM will not go after certain specific levels. Euro has a very good liquidity and it is traded very tight. 1-2 ticks. 150 (million) euros would normally not move the market; but who has that order may be of interest. Banks and traders want to know whether that is a Fibonacci level. The bank trader wonders - Is there a cluster of stops at that level? The more stops at a level and he may want to buy ahead of those levels and formations. Who is giving me this order? Most traders are paranoid. If it is from a large bank he may be wondering – does the person placing his stops know something I don’t? Maybe he will start running the stop. There are a lot of variables. Who is leading the order?  Is it smart money? The bottom line is MMs are not going after any one stop.

Do bank traders use fibonacci levels?
Definitely. You want to combine different time levels and see where the fib levels fall. For example using daily, weekly, hourly and if you have a fib level around the same area, then that is stronger.

Is the MM controlling the market? The answer is yes; unconditionally, yes. But there is competition out there. He is not able to get around to do something unscrupulously to profit. Right now MM is the house. If I call up a bank and the MM and tell him “I want 1.1377-79 as a buying price range… he tells you 1.1387-89… I say “I think you meant 1.1377-79…” No… the MM/bank is saying “I am a buyer. Why shouldn’t I have the right to make the market”? If you wanted to sell at 1.1387-89, you can. MM can show him any market he wants. MMs do not have days to set things up however…  MMs no longer have deep pockets. To a certain extent the MMs do control the markets.

Liquidity in the FX markets - Is FX really the most liquid markets? What happens during announcements? Non-farm payroll … 8:30 am EST they stop quoting. Only desk levels are open. Whoever leaves a stop, they would call and check if you want a stop… it could go 50 points through your market stop.

If you sell or buy outside of the US there is going to be the need for a hedge.  MM has to hedge out options. MMs just want to play volatility and not direction of the market. Before you had the FIX at 11:00 am EST.  Bigger banks would get in a chat room. It is small world with MMs. MMs and Traders could sell using a chat room and reach a deals with a buy and sell privately for large quantities. If they all have a lot to buy, then they would discuss how they will collude. They arrange amongst themselves and the customer gets s*&%#%d. They drive the price up higher but have been buying it earlier… This is the 11 O’Clock fix. How do you buy 5 Billion dollars in 1 sec? That is a lot of money at any time. This is however no longer the case as banks are looking at chat rooms.

Do the big, smart people get it wrong sometime?
You only hear about the success. No one talks about all the failures in professional sports, just the successful ones. There are many hedge funds going out of business. John Paulsen made a lot of money in the sub-prime, getting it right … $1 Billion… but many of his customers lost a lot of money after that. You don’t hear about that. The percentages are much worse than 30% winners. You only hear about the winners. Not the losers. Many hedge funds went out of business.

MM got to see both sides of the deal. What did the successful ones do? 

Traders all have their own style. Everyone has to understand their own style. MM would say that the guys who were more successful were the ones that were looking for a longer point of view. People that understood risk management and riding the trend did better. People who had more staying power did better. They rode a trend that was playing out in the market and those were the ones who were most successful.
There were a lot of successful people. There was one who traded every day in the morning. He traded the USD/Yen. He always came out every day on the right side by trading 3-4 hours in the morning. A trend following trader will do well when it is trend trading. He will get killed when it is going sideways. But the better trader are the ones who have good money management. High frequency traders are short term traders and they have kept volatility down… They are the algorithmic traders. There are more algorithmic traders who are trading on a very short term. Many are successful. 

401K Monthly Analysis – Sideways Shuffle 6/5/15

This is my monthly 401K post. The chart of the S&P500 (SPY) remains moving sideways with an up signal. That in itself is remarkable as the talk of gloom and doom has far outpaced the actual performance of the US markets. The bond markets are definitely showing pain. This is demonstrated on the chart of TLT, long term treasury funds. PIMCO Global bond fund is pointing down. And so is IYR Real estate funds ETF… one is left with a gloomy picture and I have succumbed to it by going to cash. The technical should have me in stock funds… but which ones?

In my current employer’s 401K the strongest funds to be in are Fidelity Invst Div Intl, Fidelity Growth Strategies and Fidelity Blue Chip growth. Bond funds in the 401K are currently losing money. International is still holding up although it seems to be starting to turn down. Forget Real estate funds right now… the Growth strategies are strong is also reflected by the QQQs treading sideways. So the strong funds are going sideways, and the weaker ones are swooning… not a comfortable time in the markets.

In my previous employer’s 401K the strongest funds are TRowe Price Intl Disc, Fidelity Invst Div Intl and Fidelity Mt Vernon Growth. Once again the international and growth funds show strength.

This is a time that if one is invested, it might be time to pare down. But if the market breaks through the resistance, investors will pile on in a hurry.

Where is Oil Headed?

Sunday morning. Its Memorial Day weekend. I had breakfast with a friend of mine visiting from Michigan. Nice crowd at IHOP as we discussed family, friends and investments. My friend is a contrarian investor. He said “take a guess as to where I am putting my money”… I replied Greece? Russia? The Ruble? He said “no… something in the US… Oil”.

After breakfast I went home and as I sat down to watch the Chelsea versus Sunderland, Premier league soccer game on TV, I looked up the ETF OIH, USL and the stock SLB. Charts for OIH and SLB are shown below. Looks like oil bottomed out – I see a double bottom on OIH and then the move up. We are now making higher highs, which is the classical definition of an uptrend. The uptrend is facing headwinds with the 200 exp moving average (black line) but the trend is certainly up nonetheless and is bouncing of the 50 exp moving average (red line). SLB has broken through its blue downtrend line and slowly climbing back upwards.

Fundamentally, there is global growth, which will continue to fuel the demand for more oil. Countries like Saudi Arabia, Iran, Iraq, Russia, and Venezuela will keep producing more oil regardless of fluctuating demand. When there is an oil glut and price drops, it will be the shale producers in the US who are “for profit” companies that will blink first and stop, reducing output and thereby again increasing the price of oil. Long term oil prices will have a bottom. That may be the double bottom we have seen or further down, but the nature of supply and demand will keep oil within a range. US is on the verge of being the largest oil and natural gas producer in the world but we are profit driven. When the price of oil drops, shale producers have to close down as they will not be able to sustain production at a loss for long. Also, their cost of production is likely higher than some of the Middle East countries. Short of a recession, I would expect oil to hold. 

I think oil and SLB are good investments for a contrarian investor. I don’t like the immediate technicals, such as OBV and the slower stochastics pointing downward. With some pull back, this should be a good buy and I think I will follow my friend’s suggestion and put some money into oil using the technicals to figure a turning point as well as a stop loss level.

401K Monthly Analysis – The trend that refuses to end

All kinds of pundits are saying we are due for a correction, time to get out but the market keeps wanting to go up. As long as Yellen holds up on raising interest rates, and as long as the growth remains tepid, we are trending upwards. S&P500 (SPY ETF) remains caught in a sideways motion for a few months now and the only resolution possible is Up or Down. See chart below.

In my current employer’s 401K, the funds showing most strength are Fidelity Growth Strategies, Fidelity Blue Chip Growth and Fidelity Div Intl. Growth, Blue Chip and International.

In my previous employer’s 401K the top funds are Fidelity Invst Div Intl, Artisan Mid Cap FD and Fidelity Mt Vernon Growth…  all in all, a blend of growth and international funds again. Bond funds are nowhere in the top few yet.  

Long term treasury bond fund (TLT) hit a lower low and has been retreating. The inverse bond fund TBF is showing signs of strength. See chart below. All this has been on the likelihood of interest rates going up. There are those that feel that the Feds cannot raise interest rates and if we see that, then the market may very well surprise the pundits once again. I remain cautiously optimistic.

Ivy Portfolio Status 42615

My implementation of the Ivy Portfolio by Faber and Richardson is to use tactical asset management with each of the 5 domains to diversify in: Bond Funds (AGG, BND), Real Estate (IYR, VNQ), International Stock funds (EFA, VEU), US Stock Funds (SPY, VTI), Commodity funds (DBC, RJI). When my technicals give me an entry, I put money into one of the two funds in the domain that is signaling up. Right now, I am in SPY, VEU and DBC. See charts on those below. I am half strength in DBC because the fund is well below its 200 day moving average and will have to work its way back up. VEU is moving up the strongest, and I think that is because of the QE program ECB President Mario Draghi has Europe in.

In my last post I had mentioned that MSFT needed to break out of its downward pattern… and it did and gave a buy signal before earnings announcement. Unfortunately MSFT is not something I invest in. It behaved very well and gave an up signal prior to the earnings announcement and then jumped up…. there were investors already betting on the up move before the earnings announcement. Could it be that they knew the good news coming or was that just chart optimism from the double bottom?
See the refreshed MSFT chart below.

MSFT chart below:

Is it time to buy MSFT? 4/11/15

A friend of mine asked me if it was a good time to buy Microsoft now as it had come down from its high. Show below is daily chart on MSFT.

MSFT has been in a downward signal since the end of last year. It is still in the throes of multi-month pullback - see the blue line sloping down touching the local highs and being unable to cross the trend line... I would wait for that trend line to be broken and an uptrend to be established before going back in. In an uptrend the 50 day ema should be above the 200 day ema ... It is currently opposite of that. If you are a contrarian or aggressive investor then you could enter... but I am not.

So far the price is holding above its support which is around $38-$40. It may start moving up or could break down below $38. One could take a chance and buy keeping the $38-39 as a stop loss level depending on appetite for loss.

I prefer to trade the uptrend by buying on dips ... for example you will see on the chart larger arrows which give the primary trend direction and small arrows which are the contrarian signals suggesting when you can buy on the dip if the larger arrow is also pointing up. Earnings season has begun. Perhaps the market is waiting for earnings news to decide which way to turn.

401K Monthly Analysis - The Trend Pauses

The S&P 500 (SPY) remains in an uptrend but short term in a pull back. As one of my IIT classmates and expert market Guru from India, Deepak Mohoni states “When you buy on pull backs you can only be wrong one time”.  There is a saying that “the trend is your friend, until the end”… and right now we are in a pull back.

My chart on SPY shows an exit long signal from 2/2/15 and I am taking a break from participating in 401K funds. See chart on SPY below. I am conservative as far as investing is concerned and will give up upside gains to avoid large losses. I show long signals on IYR which is a Real Estate ETF and also in VEU which is a Global fund excluding the US. TLT, Long Term Treasury fund also shows an up signal. I am long these funds.

In my current employer’s 401K funds, the top choices are Fidelity Growth Strategies, Fidelity Blue Chip fund and Fidelity Div Intl fund. Royce Opportunities is also showing some recovery from its large drop. Attached is a chart on Fidelity Growth Strategies. Since SPY is showing an exit long, I am out of my 401K.

In my past employer’s 401K fund, the top choices are Cohen & Steers Real Estate fund, Fidelity Spartan Extended Market Index and Fidelity Mt. Vernon Growth fund.

Some market pundits are trying to stay ahead of the market by calling for a potential drop in markets for 2015 since the market has been plodding upwards for 6 years. SPY or the S&P500 has never gone into a major decline without the 50 day exponential moving average (ema) dropping below the 200 day ema. From the chart on SPY I see that the red line (50 day ema) is still above the black line (200 day ema). I think there is still plenty of time before we see a major decline … at least 3-6 months. I try not to get too ahead of myself with long predictions as no one really knows. However based on the past, I would say we have time… and yet I am exited on my 401K… I am conservative, no doubt. I still follow the Ivy Portfolio signals and right now, it has me long in IYR, VEU and even DBC. The last one is a commodity fund and it has dropped to half its value… and I just entered it end of last week. It looks like it made a double bottom. If the world can reach an agreement with Iran on their nuclear program, then oil will flow freely from Iran into the markets and we could see past support for oil breaking and oil going much lower. There is some thought that there will be a greater need for oil tanker storage. Stocks like NAT (Nordic American Tankers) may be a better investment as oil producers produce more and more oil…