Wednesday, 17 April 2013

Currency and Commodity Trading in Turbulent Times

Ralph Shell, Excel Analyst

After witnessing on my screen the market's wild fluctuations, then viewing on TV the tragic events in Boston, the word turbulent came to mind. The Reference.com definition is as follows: being in a state of agitation or tumult: disturbed; characterized by, or showing disturbance, disorder; given to acts of violence and aggression.  Between the gold markets plunge and the violence at the Boston marathon it was a very turbulent day indeed. 

Personally, I have never understood the appeal of gold and precious metals.  Often, it seemed the market analysts were more like high pressure sales people, the kind that appear on late-night infomercials.  The story that paper money is merely fiet has become a modern fable.  Only gold represents real value and everyone needs to own gold before the surplus of paper money causes inflation.  Perhaps, but this is an very old story.  It was reported, today, the US CPI Core M/M was up only 0.1% less than expected and only 1.9% for the year.  Bernanke has been creating paper money at record rates, and where is the inflation?

Excel Markets ECN Forex Broker Demo Account Trading Contest - $10,000 Cash Prizes! - April 2013Besides, the cure for high prices is higher prices.  When the Hunt brothers were busy trying to corner the silver market, I can remember the lines of people in Chicago waiting to sell their silver.  The queue was long and move slowly as the sellers shuffled their unwanted supply of silverware, trophies and candlestick holders ahead to the buyer.  When the price of gold soared in the last few years, the ladies in Palm Beach County Florida would have a gold buyer come to private house parties.  There, in a safe private setting, they could socialize, exchange stories, perhaps recall who gave them the jewelry, and sell their old gold.

Eventually the old rejuvenated supplies, the new production, and the high price become too much.  The market imploded this week,  After trading at 1600 at the beginning of the month spot gold then traded under 1350.  When a major market such as gold has this big of a move in a short period, there is collateral volatility in other markets.

As a small trader in the forex market, there are a number of ways a large move in markets, and especially the gold market, can influence their trading.  Markets, are informally connected by psychology, and how quickly this can change.  Further, many traders in forex are also traders in related commodities such as the metals or oil.  A sharp move in any of these related markets can result in a run of GMO (get me out) orders.

Recently, the relationship between gold and currencies has been especially tight.  A prominent advisory service had recommended traders should be long gold and short the yen.  With gold at 1600 an ounce and the yen in a free fall this was a great trade while it lasted, and perhaps it is not over.  The chances are, however, considering the freefall in gold, some of these trades have been liquidated. 

To the extent that a trading account is involved in multiple financial products, the fallout from the sell-off in one asset class can pressure other assets.  A margin call because of the gold sell-off may also result in unforeseen selling of stocks or forex positions.  Any assets owned on margin are related and they are vulnerable. 

The first key to making money in the markets is not losing.  This does not mean you make every effort to break even on a trade.  Actually the break-even price is of little importance.  What is important is where is the market going from here?  Increased volatility means increased risk, as well as possible reward. 

This is not a time to stop trading, but, considering the size of the moves, it is best to reduce your position size.  If your trade is profitable, let it run.  Moves may be much bigger than expected. 

Keep up with the news and do your homework.  It is impossible to find an explanation for every spike, but you keep searching and thinking about the markets.  As an example we know from our latest COT studies that the Australian Dollar futures market has been loaded with longs. Yesterday, the open interest in the futures market was down 23,162 contracts or about 13% of the total OI.  Looking at the attached chart, we can see the A$ sold off 200 pips as longs liquidated.  Granted, the move down was partially motivated by the poor GDP numbers from China, but the market has reduced the big long.

Click AUDUSD Daily Chart to Enlarge

To summarize: these are exciting trading times with many opportunities, as well as pitfalls.  If you are comfortable with the risk, continue to trade.  It is best to trade smaller in the more volatile markets.  Finally, let your profits run.
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