So today I would like to discuss a bit about the much talked about and highly anticipated topic of QE3.  Many people have heard of this but few people actually know what it is all about.  The basic ideas is that the Federal Reserve has several way it can use to stimulate the economy and one of those ways is quantitative easing.  This is the practice of purchasing securities in order to put more money into the economy which tends to lower the long-term interest rates.  Once these interest rates are down, investors are more likely to spend money and expand business.  This expansion in business is good for the economy and can help to improve the jobs market.

In addition to this latest round of quantitative easing, we have had 2 other recent times where this same process has taken place.  The first was in November of 2008 in response to the financial crisis and the second in August of 2010.  The goal was that each of these would provide the needed stimulus to the economy but since things have not improved as expected this last round of easing was just announced.

This last announcement that was released stated that the Fed would do two things to try and help the economy.  It stated that it would keep short-term interest rates at these low levels until the mid part of 2015 and that it would be buying billions of assets each month until the end of the year.  The main difference this time is that these purchases will more of an open ended deal.

So what does this all mean?  Well, as traders, anytime the Fed takes action we generally see the markets move quickly and strongly.  This can lead to some good trading opportunities but can also bring problems to traders who are not prepared.  Let’s take a look at what happened to Gold and Silver as this announcement was made.

Take a look at the 1 min. chart below of gold and how the prices moved quickly and how the volatility increased dramatically.

Notice that the arrow points out the approximate time that the FOMC Announcement was made.  The initial reaction was for the price to move down, followed by a sharp move up which continued for the next couple of hours.  Now take a look at the daily chart below of Silver.  Notice that the reaction moved the price of Silver higher and continued with the bullish direction it has been moving.

Remember that whenever the Fed speaks, the markets usually move.  As traders we need to be prepared by know when they are talking and what we need to do to protect our positions first, then how we can benefit from these moves second.  Whether you trade or wait it’s up to you, just make sure you know what you are doing and don’t let the market dictate your reactions.

In the end Gold and Silver are very bullish so continue to look for opportunities to take advantage of these moves.  Once the price begins to show signs of weakness look for the market to retrace a bit.  Until then, continue to look for long positions.

One of the most common questions that I get asked from new stock, ETF, or Forex traders (and believe it or not from some experienced ones too) is about a few of the different order types that they can place for entry orders, protective stops and profit targets.  The most common question around this topic is simply what the difference is between a stop and a limit order.  A market order is rather straight forward in the respect that most people understand that it is an order that will be placed and executed at the current market price but stop and limit entry and exit orders can be confusing especially if you are unfamiliar with them.

If we place an entry limit order we are placing the entry order behind the current market price meaning that we are trying to get into the market at a better price than what is currently available.  We are limiting the amount that we are willing to pay to enter the market.  We are going to wait for the market to come to us to meet our price and then we will enter the market.

If we place what is called an entry stop order we are placing the order in front of the current market price waiting for the market to hopefully gain momentum and move strongly in our direction hitting our price and picking us up along the way with the continued movement in our direction.  We are actually trying to enter the market at a price that is worse than the current market price.  If we do not get the strength and momentum we are looking for we do not want to be in the trade and hopefully our order will never get filled.

The reason that these orders are called stop orders is that when they are filled for us going in our direction, the trader on the other side of the transaction is getting stopped out of their position.  We are actually stopping ourselves into the position by taking over the position of the trader that got stopped out of the transaction on the opposite side of us.

When we place our protective stop for a long position we are placing a “sell stop” order because we are selling short to close our long position at a price that is currently worse than where the market price is at that time for a sell order.  Conversely when we place our profit objective it is a “sell limit” because we are selling short to close our long position at a price that is better than the current market price at that time for a sell order.

When we place our protective stop for a short position it is a “buy stop” because we are buying into the market to close our short position at a price that is worse than where the market price is at that time for a buy order and when we place our profit objective it is a “buy limit” order because we are buying to close our short position at a price that is better than where the current market price is at that time for a buy order.

Yesterday was Sept 11, 2011. The Day that Trading didn’t really matter!

On Sept 11 2011 at 8:00am. Eastern Time, I was sitting at the Bond trading desk of a Bond Dealer far from New York City, where I worked.  That morning I was monitoring a new price feed coming into our electronic trading platform from Cantor Fitzgerald, a major  bond dealer with headquarters in the World Trade Center.  I had been testing this new electronic trading platform and this day had culminated hours of programming and testing on the part of several employees of Cantor and the Dealer that I was working at.  We were about ready to introduce the new platform with live bond prices to several of our institutional trading clients, which for the first time would include live bid and offers on treasury bonds from  from the inventory of Cantor Fitzgerald.

Just after 8:30 am several traders who worked on our trading floor, (some of whom had worked at the World trade center) in horror, started screaming at the monitors which had CNN and CNBC displayed on them.  The entire trading floor was suddenly silent and horrified at the events that unfolded before us.  The first plane had hit the first tower and then without warning the second plane hit the other tower.  After these stunning events, I looked down at the monitor showing the pricing data coming in from Cantor.  Something was different and very startling the Cantor Feed was blank “NO DATA CONNECTION” it said. That was a somber moment as I realized that the Cantor data feed was originating from the trading desk at the World Trade Center.   At this point in time I remember thinking that the phone lines and communications were down because of the fire.

A few minutes later everybody’s were just “dumbstruck.”  When the towers collapsed like  pancakes as we watched the coverage on  CNN.  It started to sink in,  the Cantor feed was not only “not connecting” but the feed was “gone”  At that point I could only hope that the people on the other end of that data feed had gotten out of the building in time. They had not.

Later, the whole world was horrified to learn that the Cantor Fitzgerald’s corporate headquarters located on the 101st-105th floors of One World Trade Center (2-6 floors above the impact zone), were completely destroyed during the attacks.  Cantor Fitzgerald was the company hardest hit on Sept 11^th; ALL 658 of its employees who were in the office at the time were killed. There was no Data Feed, No Server, Nobody left.  I also know other people who were in the towers at the time and got out . Life is an interesting thing; we never know how long it will last.

In our quest for success and profitable trades, let us remember what is important in life, our relationships, our  families, our friends, our co-workers, and our neighbors…..The bottom line is that People Matter.   As hard as this blow was to the company Cantor Fitzgerald, it was the employees who remained who somehow carried on…. they had the data servers working within a week or so from an alternate location.

Traders Challenge:  Don’t take anybody in your life for granted and appreciate every minute we have!

It is often quoted that the “Trend is your friend” but is this really true?  If it is true then all we should need to do is jump into a trade that is in an up trend or down trend to make money.  Once we are in the direction of the trend we just count the pips and become rich.  Well,  if it was that easy we would all be very wealthy very quickly.  So in order to make sure the trend is our friend we need to take into consideration a few other things, namely Support and Resistance.

Take a look at the chart below.  This chart is the daily chart of the USD/CAD which is currently in a long term, strong down trend.  Notice that if we were to trade in the direction of the trend we would be shorting or selling this pair.  But with the price sitting at a support area that might not be the best idea.

Notice the red arrow near support on the chart.  If you would have sold when the price was near this level you would have waited for about 19 days for the price to move back in the direction of the trend.  If you would have waited to sell as resistance instead of at support your move would have occurred much quicker and your profits would have come much sooner.  This also allows you to take more trades as your funds are not just sitting waiting for the price to move.

The goal for getting into any trade is to buy or sell at the best time.  If we are looking at the trend only, we are missing part of the big picture.  By including the levels of support or resistance into our evaluation of the trend, we will enter at the best possible times.

In the chart below I have outline the proper places to be buying and selling and where those place should be in relationship to the trends.

So the goal is to set up our trades as outlined above.  If you are looking for an opportunity to buy, you want the trend to be going up while it is near the support area and if you are looking to sell you want the trend to be down and near resistance.

If you can remember these two simple rules you will increase your ability to enter at the correct time when trading.  If not, the trade may still be your friend, but it might just take a little longer than what you want it to be.  Take some time to practice identifying these areas on your charts.

Today we are going to discuss a little bit about the economic data called the U.S. Non-Farm Payroll.  This is a monthly report that can cause volatility to enter the market place and cause traders to move the prices quickly, either to the up side or down side.  Gold and Silver are certainly not exempt from this possible volatility and we will see what happened today when the numbers came out.  Before we look at that let’s take a look at what this release is all about.

The Non-Farm Employment or Non-Farm Payroll report is released on the first Friday of the month and looks at how the number of employed people changed during the prior month.  Now, as the name implies this report excludes those in the farming industry.  Because job growth is considered a leading indicator of consumer spending, which is good for the economy, we need to pay attention to this number.  If jobs are not being created the economy is not expanding like it should.  If jobs are being created then that is a good sign of economic strength.

Now that we have a basic understanding of what this report is we can look at what happened to Gold and Silver when the report was released today.  This report, like many others, has a “Forecasted” number that the market is watching to see if the actual number comes out better or worse than this expected number.  Today the forecast was set at 123,000.  This means that it was expected that 123,000 new jobs would be created in the last month.  The actual number came in below expectations.  The actual number was only 96,000.  The usual impact on the currency is that if it misses the expectation, like this did, the currency is going to weaken.

Regardless of how the number comes out we need to be prepared to see a more volatile market.  This can cause opportunities and risks that are usually not there.  If you are prepared you can be ready for what ever may happen.

Take a look at the two charts below to see how Gold and Silver reacted to the report when it was released.  These charts are the 5 min. time frames and you can see the immediate reaction.

Gold

Silver

You can clearly see the huge reaction that occurred to the up side.  If you were looking to trade this you could have seen a nice quick profit.  Now sometimes this can seem exaggerated on the shorter term chart so take a look at the same charts below, but on the daily time frame.

Daily Gold

Daily Silver

 

So, even on the daily charts you can see the extreme nature of the move as today’s candlestick is much bigger than the normal movements.  The other thing you can see on both the Gold and Silver daily chart is that it has continued to take out the past highs and the upward momentum has been extremely strong.  In a market like this you will want to look for opportunities to trade this trend but also be aware that at some point it will pull back.  Make sure you trade what you are seeing on the charts to make any decisions to buy or sell.

Finally, as always use good risk and money management in all your trading.  By keeping your risk at a reasonable level you will avoid the problem of taking huge losses in this type of volatility.

The FOMC is the Federal Open Market Committee and is a committee within the Federal Reserve System and is made up of seven Board of Governors, who are appointed by the President of the United States and confirmed by the Senate for 14 year terms.  The Chairman of the Board of Governors, who is currently Ben Bernanke, is appointed from within the board for terms of 4 years at a time.  George W Bush first appointed Ben Bernanke and President Barak Obama reappointed him for another 4 year term.  Alan Greenspan the previous chairman served under 4 different presidents.  The FOMC is made up of the seven governors and 5 of the 12 Federal Reserve Bank Presidents on an annual rotating basis.  This Committee meets 6 times per year and this brings us the meeting scheduled next week September 12-13, 2012.

With next week’s meeting there will be a statement on  Thursday September 13^th at 2:30 pm Eastern.  Included in this announcement is expected a comment about plans for a third additional economic stimulus commonly referred to as Quantitative Easing or QE3?  What is QE3 you might ask?  Several years ago most people might have guessed , a British cruise ship named after the Queen.  Simply put it is the Fed’s program for Buying Treasury bonds and injecting money into the banking system to help stimulate the economy.  The Stock market literally took off after the first two rounds QE1 and QE2, and has been anticipating this third program for several months now.  The conventional wisdom is that if a Third program is undertaken the Stock market will rally and continue its current bullish trend.  Several factors enter into this decision the FOMC will make. The largest of which, is the current economic outlook for the US economy and looming debt crisis in Europe.  These two main factors are at issue and until last week it looked as though QE3 was a done deal, but with improving economic data coming out of the U.S. and The European Central Bank’s announcement this week of its own massive stimulus program (bond buying program for the countries of Europe), the FMOC may decide to hold off and wait for the next meeting to make a decision.

So will there be a QE3 or no QE3?  That is the BIG Question!  The Fed really doesn’t want to act if it doesn’t feel that it is absolutely necessary as there are several possible negative effects into the future if such a program is undertaken.    The general downside to a Federal Reserve stimulus is the potential for an excess of money in the system which could lead to inflation and a general weakening of the US dollar.  Over the last two programs QE1 and QE2 the U.S. dollar lost value relative to the other main currencies.

So what will the Fed do? We will all have to wait until next week’s announcement.  Until we know for sure, there will most likely be continued uncertainly in the market.

So today we are going to discuss some of the issues we need to address when trading the Forex market on a holiday like we had this week.  Here in the US and Canada we recently celebrated the Labor Day holiday and the question we need to ask ourselves is are we going to trade or are we going to stand aside for the day.  Other than enjoying some time off from trading, there are other real strong reasons why we may want to stand aside while the markets are closed during the holiday.

Just the fact that we are asking ourselves whether we should be trading or not tells us that we recognize that there may be some issues during these times.  Some  holidays are considered major holidays while others are considered minor ones.  The major holidays are those where multiple markets are closed on the same day.  An example of a major holiday would be Christmas or New Years where even the Forex dealers close down.  Minor holidays like Labor Day in the US are less of an issue as it only affects a small portion of the Forex market.

So now that we know that there may be some issues with trading during these times, we need identify why these issues arise.  Let’s start with a few things that should be fairly obvious.  The first issue that happens with a holiday is that the overall market liquidity tends to go down.  One of the advantages of the Forex market is that there are lots of traders causing high liquidity.  This high liquidity makes it so the spreads are smaller and entering or exiting our trades can be faster.  Well, if there is a holiday this liquidity can become lower causing the market to have wider spreads and make it more difficult to enter or exit trades (although it is still pretty fast).

Another problem that occurs with the holiday and lower liquidity is that the market can become non-deliberate in it’s movements.  This can be in the form of higher volatility or in the form of a flat moving market, either of which can make trading more difficult.  Ideally, we want to be trading in deliberately moving markets and the holidays can make this not happen.

So, what can we do?  Well, we could simply take a holiday along with everyone else and that would avoid the issue all together.  We could continue to trade and try to figure out ways to take advantage of this added volatility or lack thereof.  If we consider trading during the holiday the wise approach would be to simply lower the amount of risk we are taking in each of our trades so the affect of the market will be less.

So as to the question of trading or not to trade during a holiday it is left up to you.  Just make sure you understand  the added risk when trading and take appropriate action to limit the increased risk.  For those of you in the US and Canada, Happy Labor Day, for the rest of you, continue to trade well.