Tips on FOREX trading

There are a few things your Forex broker doesn’t want you to know. Or I should say there are a few things your “dealing desk” Forex broker hopes you don’t find out.

I say “dealing desk broker” because honestly, only dealing desk brokers care how market savvy you are. Regular non-dealing desk brokers couldn’t care less. They don’t care how (or if) you make money on your trades. They get their standard fee spread either way.

But dealing-desk brokers…well, that’s a whole other story.

A “dealing desk” brokerage firm actually has traders sitting at a desk, who make their living betting against their clients’ trades. In other words, they follow a trading model that ensures they win when you lose.

And vice versa. When you’re congratulating yourself over that last winning trade, your dealing desk broker is sitting on a loss.

Why is this profitable for a brokerage house? It’s because most Forex traders are novices. These beginners try to trade on their own, so they often rack up the losses. This gives “dealing desk brokers” a natural advantage.

Of course, it’s not difficult to give yourself the advantage. In fact, it’s pretty easy. But you have to know a few “Forex secrets” that your FX dealing desk broker definitely won’t tell you. In fact, he’s betting you don’t know these tricks.

So let’s shake things up a bit and take a look at the top three secrets your broker doesn’t want you to know.

Secret #1: It’s All About the Fundamentals

Firstly, you need to trade on the side of the fundamentals and never against it. So pay attention to what central bankers are saying about their economies. This is important. They may not always give you all the facts, but you can usually get at least an idea what they will do next from their statements.

Central bankers will give you their thoughts on their respective economies. And if they don’t tell you outright, you can tell by their actions. For example, when central bankers raise rates, it means they’re fighting inflation. That’s usually a good sign for the country’s currency. However, if inflation is shrinking or if the central bank is in “rate cut” mode, then it’s bad for the currency.

If the economy is growing (according to its GDP numbers), then that’s another plus for a country and its currency. On the other hand, a falling GDP either means a country is slowing or the economy is shrinking rather than expanding. Either way, that’s a bad thing for the country’s currency.

So to find the perfect currency pair to trade, you need to play “matchmaker.” Match up the best-looking country with high inflation and rising interest rates with the ugliest country with the worst fundamentals (lower inflation and slashed interest rates). Once you have your “best-of” and “worst-of” currencies, simply trade the good country vs. the bad country.

For example, let’s say you decided the U.S. dollar was the “ugliest” currency in the world because the U.S. is slowing and the Fed just cut rates. You also decided that the euro was the best-looking currency. In this instance, you would buy the EUR/USD pair.

Your dealing desk broker doesn’t want you to trade with the proper fundamental direction. They’d prefer you “trade against the trend” of the economic fundamentals. These greedy brokers want to you to “pick tops” and “pick bottoms” (and ultimately fail) because you’re fighting the trend. You do that, and your dealing-desk Forex broker wins.

Secret #2: Trade Less Than Your Broker Wants You To

The second secret is how much leverage to use. Trust me: Your dealing-desk broker would love you to pour on the leverage (a.k.a. trade more “lots” per trade).

Why? The bigger the lot size that you use, the more money you have to pay them in fees in the short-term (because you pay the spread as your fee, and higher leverage means a greater the number of lots which means more spreads for them). On the other hand, if you use a smaller lot size, and use less leverage per trade, then you pay your broker fewer spreads, at least in the short-term.

So if you use a ton of “lots” and trade very, very frequently, then you’re actually helping out your broker (not necessarily yourself). Your dealing desk broker will love you because your over-trading is “good for business.” You’re also making a ton of money – only for your broker, not yourself. That’s why they’ll always encourage active trading.

However, you’ll build up your trading account over the long-term if you trade a lower number of lots in proportion to your account size. Also, if you trade less frequently and hold trades longer, you’ll help yourself and your trading account rather than your broker.

Secret #3: Buy and Hold and Rake in “Daily” Interest!

The last secret is you should always trade “with” the carry interest when possible. Carry interest involves buying a currency from a “higher interest” country that is outperforming a currency from a lower interest country. You’ll give yourself an advantage if you invest in the higher interest currency, and then hold it for a while to pick up the daily interest.

By the way, make sure you compare interest rates between potential brokers. In theory, they should all pay you the same interest. However, in practice many brokers won’t pay as much interest as they should. Interest adds up, so check this out before you open up your account.

Tip: It’s best to go with a “no-dealing desk” broker that pays out favorable “rollover interest” (aka carry interest).

Now, here’s the word of caution with these “carry trades.” (Remember carry trades? They involve borrowing a low-yielding currency and using those funds to invest in a higher-yielding currency.)

Just because you’re invested in a “high interest” currency, does not mean that currency will stay on top forever. Eventually the higher interest country will start to slump. That country’s central bank will start cutting rates. If you see rate cuts coming, don’t bother buying a currency just because it pays higher interest.

ONLY take the longer term carry trades when the higher interest country (compared to the lower interest country) is expanding more favorably. You’re looking for a high-yielding country that has higher inflation than the lower interest country. Then, in those times, you have a fundamental support for these trades.

Case in point, many traders like to buy GBP/JPY because it pays out good “daily interest.” However, right now, the U.K. economy is crumbling and headed for a recession. This means the Bank of England will soon have to cut rates.

In times like that, you don’t want to buy that pair. Instead, wait for the fundamentals to turn around and the central banker starts to report a more favorable outlook. Once that happens, then you can resume “carry trading” for a longer term position.

The Golden Rules of Trading Forex

To recap: Buy ONLY the country in the pair that has the more favorable fundamentals and make sure you pair that strong country with a poor country with eroding fundamentals. This gives you the edge over the house which is the market maker or what many refer to as “brokers”.

Then even when trading in the right fundamental direction, make sure to limit your leverage. I prefer mini-lots. If you’re trading mini-lots, I suggest using US$5,000 or more in your account (per 1-2 mini lots traded).

This means you’ll be able to trade with a well-funded account for quite some time. Also, your dealing desk broker will hate you because you don’t trade as often.

Then finally, when the fundamentals are working in your favor, buy the higher yielding currency against the lower yielding currency. Hold onto that pair with a low leveraged position and collect the “daily interest.”

Again, this will frustrate your broker, but it gives you one more way to become profitable on the trade. It also gives you the edge and takes the advantage away from the “house,” (aka your brokerage firm).

Even if you ultimately choose a no-dealing desk broker, still follow these same rules because it will help you be successful on your trades in the long run.

So keep in mind these “secrets” that I’ve learned from all of my years of “being on the inside.” This way, you’ll have the natural advantage – instead of your broker.

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Future Price of Oil

Want to know what the price of a barrel of oil will be in eight years? Exactly $119.50 a barrel.

There’s no shortage of pundits predicting where oil prices are heading. And every day seems to bring new reasons to change the forecast – a resurgent dollar, Americans curtailing their driving habits, oil supply reports… The list goes on.

But the guys who really know the future of oil prices are those sitting right in the driver’s seat – oil producers.

Every day, they make bets about the direction of petrol prices on the futures market. And right now, they’re telling you – in no uncertain terms – oil’s got a floor price of $100 a barrel for years to come.

“Oil-flation” is here to stay".

The Future Price of Oil – And Why You don’t Need a Crystal Ball

Crude oil is the world’s most actively traded commodity. Every day, oil producers trade futures contracts on the New York Mercantile Exchange (NYMEX) to hedge against price swings.

At the end of the day, they – along with speculators who bring liquidity to the market – determine the price of oil, which is simply a reflection of the market’s attempt to balance supply and demand.

So, that prediction of $119.50 a barrel? That’s a recent closing price on NYMEX for the December 2016 contract.

Fact is, NYMEX has over 1,000,000 active futures contracts or “open interest” on crude oil for the next eight years and not one trades below $112 a barrel.

That means the guys in the business – the ones who make their living producing and selling oil – are predicting oil will be priced over $112 a barrel for most of the next decade.

Why are they predicting the continuation of triple digit oil prices?

Plain and simple, the markets are telling us future demand for oil will outstrip supplies.

Demand for Oil Keeps Growing

Although demand is highest in the developed world, exploding economies like China and India are quickly becoming large oil consumers.

The United States is still the world’s largest consumer of petroleum and our thirst for oil is growing rapidly. Between 1995 and 2005, U.S. consumption grew from 17.7 million barrels per day (bpd) to 20.7 million bpd – a 17% increase.

In the same time frame, China’s consumption vaulted from 3.4 million bpd to 7 million bpd – a 106% increase. And that number’s rising, as China surpassed 8 million bpd for the first time in June.

Meanwhile, India’s oil imports are expected to more than triple from 2005 levels by 2020, rising to 5 million bpd.

All totaled, Asia accounts for 60% of the world’s new oil demand.

Putting a worldwide number on it, the International Energy Association recently increased its 2009 oil demand forecast to 87.8 million barrels a day.

On top of that, The U.S. Energy Information Administration projects world consumption of oil to increase to 98.3 million bpd in 2015 and 118 million bpd in 2030. That’s a 35% increase by 2030.

Oil Production Dropping?

By now, you’ve probably heard of the Peak Oil theory – that worldwide oil production has peaked and is now dropping. Consider:

1) The U.S. Energy Information Administration Energy contends that world production leveled out in 2004, and reached a peak in the third quarter of 2006.

2) Oil tycoon T. Boone Pickens recently told Congress, “I believe you have peaked out at 85 million bpd globally.”

3) And at a recent industry conference, the chief executive officer of Total SA (TOT: 64.21 -0.96 -1.47%), the French oil major, said the industry would be lucky to produce 95 million bpd by 2020.

But whether you believe Peak Oil is true or not, at least nine of the largest 21 oil fields on the planet are in decline.

In 2006, a Saudi Aramco spokesman admitted that its mature fields are declining 8% per year. It’s now clear that Ghawar, the largest oil field in the world, has peaked.

The second largest, the Burgan field in Kuwait, started down in 2005. And Mexico announced that its giant Cantarell Field entered depletion in 2006.

Reserves Don’t Equal Production

Then there’s the matter of oil reserves, a moving target if there ever was one.

Oil reserves are classified three ways:

1) Proven; it reserves have at least 90% to 95% certainty of entering production.

2) probable; it reserves have 50% probability.

3) possible; it reserves have a 5% to 10% chance.

A 2007 report by the Energy Watch Group pegged total world proven plus probable reserves at between 850 and 1,250 billion barrels. That’s 30 to 40 years of supply if demand holds steady – which it won’t.

But as Sadad I. Al Husseini, a former VP of Aramco, said in October 2007, “Reserves are confused and inflated. Many of the so-called reserves are in fact speculative. They’re not delineated, they’re not accessible, they’re not available for production.”

By Al-Husseini’s estimate, 300 billion of the world’s proven reserves should be re-categorized as speculative.

On top of that, about 70 oil-producing nations don’t reduce their reserves to account for yearly production. As noted investor Jim Rogers says, “Despite consistently pumping 8 million bpd for over two decades, Saudi Arabia has repeatedly stated their reserves are at 267 billion barrels.”

Organization of Petroleum Exporting Countries (OPEC) member nations even have economic incentives to exaggerate their reserves, as the OPEC quota system allows greater output for countries with bigger reserves.

The reality is this: it’s highly likely we have a lot less than 1,200 billion barrels to burn in the next 30 to 40 years.

And increasing demand could have us running on fumes in an even shorter span.

New Production — a Pipe Dream?

Even though we continue to hear about new oil discoveries, new oil reserves will be harder to find and extract.

Take Kazakhstan, for instance. Its oil fields are slated to be the third largest in the world. The heralded Kashagan field should produce 1.5 million bpd at its peak. But technical problems continue to plague the project.

In 2005, production was scheduled to start in 2009. A year ago that was moved to 2011 and now it’s been pushed back to 2013. And the projected cost has risen to a whopping $50 billion.

Canada’s oil sands are another example. Production could reach 5 million bpd by 2030 in a “crash program,” but the oil contains contaminants such as sulfur and carbon that are difficult to extract and leave highly toxic tailings.

Frankly, the most easy-to-extract oil has been found. Price increases have led to exploration where high technology is required and where it is much more expensive to extract the oil.

We are replacing OPEC oil that costs $3 per barrel to produce with deep-water and other nonconventional sources at $60 per barrel and up.

And that’s why the markets are predicting triple digit oil prices are here to stay.


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Contrarian View in Perspective

A contrarian believes that certain crowd behavior among investors can lead to exploitable mispricings in securities markets. For example, widespread pessimism about a stock can drive a price so low that it overstates the company’s risks, and understates its prospects for returning to profitability.

Identifying and purchasing such distressed stocks, and selling them after the company recovers, can lead to above-average gains. Conversely, widespread optimism can result in unjustifiably high valuations that will eventually lead to drops, when those high expectations don’t pan out. Avoiding investments in over-hyped investments reduces the risk of such drops.

Professionals vs. Non-professionals

“Whenever you find yourself on the side of the majority, it’s time to pause and reflect.” - Mark Twain

What is the “Crowd”? They are the group of not-so-smart institutions, individual investors, traders, speculators, and other players in any market that form a collective opinion that is expressed in the terms of a degree of optimism or pessimism. We will call them the non-professionals.

The professionals are the “smart money”. These are the very few that are aware of crowd behavior and are able to adjust their strategies (long and short) to profit from extreme sentiment. Please note that professional does not mean institution by definition. Most institutions are part of the crowd. The media’s definition of “professional” is not always correct so be aware of the difference.

The key point to make is that when non-professionals display an excessive amount of optimism or pessimism, the professionals enter into the market and drive prices in the opposite position. Any truly non-professional, one-sided opinion or expectation of a market will be unable to anticipate a movement created by the professionals in the opposite direction that is anticipated by the group of non-professionals. This is contrarian investing, going against the masses that believe in only one direction of a market and taking advantage of their unanimous opinion by crushing them on the other side.

How does this work? Some might argue that if everyone’s buying and extremely positive, then why would the market crash? The answer: as more and more investors buy, the market will be almost fully invested. The last ones buying are the ones that bought into the market when the professionals were selling and will be stuck because of this overhead limit. After everyone’s bought, there won’t be anyone left to sustain the buying. Therefore, a fearful panic ensues and the masses start to sell, often times much later than they should have done.

A Recent History of Crowd Behavior: NASDAQ

“You don’t get harmony when everybody sings the same note”. - Doug Floyd

* 12/17/2001 (Brokerage House Strategy) - “2002 - Bring It On: Double-digit earnings growth and benign inflation environment will fuel a 20% gain in the S&P 500 to 1375 by year-end. (Note: the S&P 500 returned -22% at the end of 2002!!!)

* 12/31/2001 (Barron’s) - “The Case of the ‘Super-V’, three stimulating economic factors may come together for 2002″ (Note: There has never been a “V” bottom for bear markets that declined 18 months or longer)

* 1/2/2002 (NY Times) - “The Outlook for Stocks, for investors, 2002 should be better than 2001″ (Note: Still optimistic sentiment holding out in the market)

* 1/2/2002 (WSJ) - “After Two Years of Suffering, Investors Hope for a Rebound” (Note: feelings of depression and hopelessness)

* 12/31/2001 (BusinessWeek) - “Q&A: Still a True Believer in Dow 36,000″. In 2002, the Dow lost another 16.67% and the NASDAQ lost an additional 31.53%. The famous harbinger of this theory is James Glassman. He is 61 and will probably not be able to see his own theory work.

Even towards the bottom, everyone was still optimistic. A bottom cannot form when there is still a divide in sentiment. As the crowd was buying and hoping for a quick rebound, the professionals were still shorting the market the whole way down. The smart money bought toward the end of 2002 when the crowd was bleeding into hopelessness. A technical clue is when the current low is higher than the previous low.

A Perfect Example of a Professional: J. Paul Getty (1892 - 1976)

Billionaire Sir J. Paul Getty said it best in the first chapter of his book How to Be Rich, entitled “How I Made My First Billion”:

“In business, as in politics, it is never easy to go against the beliefs and attitudes held by the majority. The businessman who moves counter to the tide of prevailing opinion must expect to be obstructed, derided and damned. So it was with me when, in the depths of the U.S. economic slump of the 1930s, I resolved to make large-scale purchases and build a self-contained oil business. My friends and acquaintances - to say nothing of my competitors - felt my buying spree would prove to be a fatal mistake.”

In 1962, he was buying when the following headlines were printed in the media:

* “Black Monday Panic on Wall Street”
* “Investors Lose Billions As Market Breaks”
* “Nation Fears New 1929 Debacle”

Shortly afterwards, he mentioned: “I’d be foolish not to buy. Most seasoned investors (Professionals!!!) are doubtless doing much of the same thing. They’re snapping up the fine stock bargains available as a result of the emotionally inspired selling wave.”

He was completely right.

Contrarian Strategies

“The fastest way to succeed is to look as if you’re playing by somebody else’s rules, while quietly playing by your own.” - Michael Konda

* Buy when media headlines read the absolute worst and there is no sentiment divide among investors. Once sentiment becomes entirely pessimistic, buy. Also look out for a bottoming of new capital in flows into stocks. Historically, the good time to buy was when capital in flows were between 10 -15%.

* Sell when everyone is overly bullish and capital in flows into common stock & mutual funds reach a high. (In 1960 the market declined 18%, in 1962 -29%, in 1966 -27%, and in 1968 -37%, while stock ownership levels were between 32- 34%, the highest ever. In 1999-2000, stock ownership levels were at 31-33%, at all time-high)

* Don’t fight the trend. If the primary trend is down, go short. If the primary trend is up, go long. Why fight the long-term direction of the market? Stop trying to be a hero.

* Watch financial networks and read newspapers and magazines to get an idea of where sentiment levels are. Magazine covers are my favorite.

Conclusion

“Follow the path of the unsafe, independent thinker. Expose your ideas to the dangers of controversy. Speak your mind and fear less the label of ‘crackpot’ than the stigma of conformity. And on issues that seem important to you, stand up and be counted at any cost.” - Thomas Watson

It’s safe to say that following the real professionals is the way to go. In order to do that, you have to know how they play. There are three points that need to be stressed:

1) there is tremendous pressure and influence to join the crowd and gain easy acceptance,

2) the crowd is wrong in the majority of times,

3) under duress, psychologically, our emotions and objectivity can become distorted and cause us to rationalize (a dominant coping mechanism) or deny (a dominant defensive mechanism) even the basic realities of truth.

Investors will be able to join the crowd when appropriate, but remain flexible to leave the crowd at times when the market warns us. I encourage each investor to respect the nature of human weakness and to become a free-spirited independent thinker.

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F.E.A.R is "False Event Appearing Real"

"BRAVERY is essential in all things, for while the aspirant allows the negative accumulation of fear to discolour his outlook, he cannot ever truly aspire to Freedom.

"Freedom from fear can be brought into active manifestation within all men providing they have knowledge. Knowledge of the right kind dispels fear, whether the manifestation of this fear be petty or more potent.

"It is not necessary for man upon Terra to fear man upon Terra, for if you obey the Unchangeable Laws, indeed by your obedience do you burn fear in the bright light of dawning Enlightenment.

"Man upon Terra today is beset by strange fears which imprison his actions, his very outlook; which imprison his mind—aye, even his psychic abilities.

"Fear is a weapon being now used by the darkest forces to cause you to become their ignorant pawns.

"Break away from this fear by delving deep within yourself and discovering the great dormant Powers which are latent there.

"Break away from this tight bondage by so Enlightening your­selves that this weapon may be rendered useless.

"Study fear for what it is. Study it coldly without emotion. You will discover that it is but a state of mind which you have formulated for yourselves.

"This state of mind is the result of Karma, environment and present outlook.

"Karma—you can, at this very moment, make for yourself a Kar­mic pattern which, when manifested, will not bring vague fear as a result.

"You can rise above environment, for it is a changing thing, it is not real.

"Knowledge gained by adherence to the Unchangeable Laws can bring to you that stage of Enlightenment which dispels fear. A state of mind can be changed at once for good or for evil. It is just as easy to have a state of mind unclouded by fear as it is to allow it to be warped by this intrusion.

"Have this outlook upon Life. Act in this way and fear becomes non-existent.

"When fear has been transmuted in the fires of applied knowl­edge, tempered by Love, you become Wise. In your Wisdom there is fortitude and BRAVERY.

"The First Freedom—dispel fear. Go forth into BRAVERY and you will know many things, for you will have taken an essential step upon the ladder of Evolution.

"There will come a day when you will be examined in this Light. Prepare for tomorrow's examination now and Mastery will be yours...

"BRAVERY is victory through experience. "Be Brave, not foolish; but Brave through Wisdom—and know The First Freedom.