Friday, 17 November 2017

What is The Elliott Wave

An Educational Article

Ralph Nelson Elliott developed the Elliott Wave Theory in the late 1920s by discovering that stock markets, thought to behave in a somewhat chaotic manner, in fact traded in repetitive cycles.
Elliott discovered that these market cycles resulted from investors' reactions to outside influences, or predominant psychology of the masses at the time. He found that the upward and downward swings of the mass psychology always showed up in the same repetitive patterns, which were then divided further into patterns he termed "waves".

Elliott's theory is somewhat based on the Dow theory in that stock prices move in waves. Because of the "fractal" nature of markets, however, Elliott was able to break down and analyse them in much greater detail. Fractals are mathematical structures, which on an ever-smaller scale infinitely repeat themselves. Elliott discovered stock-trading patterns were structured in the same way.
Market Predictions Based on Wave Patterns.

Elliott made detailed stock market predictions based on unique characteristics he discovered in the wave patterns. An impulsive wave, which goes with the main trend, always shows five waves in its pattern. On a smaller scale, within each of the impulsive waves, five waves can again be found. In this smaller pattern, the same pattern repeats itself ad infinitum. These ever-smaller patterns are labelled as different wave degrees in the Elliott Wave Principle. Only much later were fractals recognized by scientists.

In the financial markets we know that "every action creates an equal and opposite reaction" as a price movement up or down must be followed by a contrary movement. Price action is divided into trends and corrections or sideways movements. Trends show the main direction of prices while corrections move against the trend. Elliott labelled these "impulsive" and "corrective" waves.

Theory Interpretation
The Elliott Wave Theory is interpreted as follows:
Every action is followed by a reaction.
Five waves move in the direction of the main trend followed by three corrective waves (a 5-3 move).
A 5-3 move completes a cycle.
This 5-3 move then becomes two subdivisions of the next higher 5-3 wave.
The underlying 5-3 pattern remains constant, though the time span of each may vary.

Theory Gained Popularity in the 1970s
In the 1970s, this wave principle gained popularity through the work of Frost and Prechter. They published a legendary book on the Elliott Wave entitled "The Elliott Wave Principle – The Key to Stock Market Profits". In this book, the authors predicted the bull market of the 1970s, and Robert Prechter called the crash of 1987. (For related reading, see Digging Deeper Into Bull And Bear Markets and The Greatest Market Crashes.)

The corrective wave formation normally has three distinct price movements - two in the direction of the main correction (A and C) and one against it (B). Waves 2 and 4 in the above picture are corrections. These waves have the following structure:

Note that waves A and C move in the direction of the shorter-term trend, and therefore are impulsive and composed of five waves, which are shown in the picture above.
An impulse-wave formation, followed by a corrective wave, form an Elliott wave degree consisting of trends and countertrends. Although the patterns pictured above are bullish, the same applies for bear markets where the main trend is down.

Series of Wave Categories
The Elliott Wave Theory assigns a series of categories to the waves from largest to smallest. They are:
Grand Supercycle
To use the theory in everyday trading, the trader determines the main wave, or supercycle, goes long and then sells or shorts the position as the pattern runs out of steam and a reversal is imminent.

Reference: Investopedia

Dollar weakens on report Trump's election campaign subpoenaed

TOKYO (Reuters) - The dollar slipped on Friday, weakened by a Wall Street Journal report that investigators into possible Russian interference in the 2016 U.S. presidential election had subpoenaed President Donald Trump’s election campaign for documents.

Special Counsel Robert Mueller’s team issued the subpoena last month for documents containing specified Russian keywords from more than a dozen officials, according to the report.

The dollar index against a basket of six major currencies was down 0.35 percent at 93.593.

The index had edged up overnight to pull away from a four-week trough of 93.402 set on Wednesday. Wall Street shares rallied overnight after sagging through much of the week, causing a 4 basis points jump in the long-term Treasury yield to shore up the dollar.

“Dollar selling picked up after the market became aware of the Wall Street Journal’s report,” said Yukio Ishizuki, senior currency strategist at Daiwa Securities in Tokyo.

“Dollar demand from institutional investors appeared quite strong but selling by speculators seemed even stronger. We are likely to see choppy moves as participants try to adjust their positions before Thanksgiving Day (on Nov. 23).”

The greenback dropped about 0.6 percent to 112.405 yen JPY=, lowest since Oct. 19.

The dollar had bounced overnight from a one-month low of 112.470 yen midweek as an ebb in investor confidence halted a surge in global equities and lifted the Japanese currency.

“While the comeback in equities has stopped the recent decline in Treasury yields, focus remains on U.S. tax reforms,” said Junichi Ishikawa, senior forex strategist at IG Securities in Tokyo.

“Yields cannot rise much further when it is unclear whether tax reforms can go through this year. Dollar/yen can test the 114.00 handle but lacks momentum for a sustained surge under such conditions.”

The U.S. House of Representatives on Thursday approved a broad package of tax cuts sought by Trump. The debate now moves to the Senate, where Republican majority is smaller and no decisive action is expected until after next week’s Thanksgiving holiday.

The euro rose 0.35 percent to $1.1814, paring overnight losses.

The common currency was on track to gain 1.2 percent on the week. It had rallied to a one-month high of $1.1862 on Wednesday after data showed strong growth for Germany’s economy in the third quarter.

Against the sagging dollar, sterling extended gains after drawing support overnight when an initiative by European Central Bank President Donald Tusk on Brexit negotiations was taken as mildly positive.

The pound rose 0.35 percent to $1.3238 to put further distance between the week’s low of $1.3063 marked on Monday when perceived troubles for British Prime Minister Theresa May hurt the currency.

The Australian dollar crawled up 0.15 percent to $0.7598. It was still poised to end 1 percent lower on the week, during which it sank to a near five-month low of $0.7567 on lower commodity prices and weak domestic data.

Reporting by Shinichi Saoshiro

Sterling unmoved by retail sales data; Brexit eyed

LONDON (Reuters) - Sterling was only a touch higher on Thursday as investors largely ignored marginally better-than-expected retail sales data, focusing instead on uncertainty around Brexit negotiations.

The pound fell to a four-week low against the rallying euro on Wednesday, after numbers showed wages still lagging well behind inflation, keeping pressure off the Bank of England to raise interest rates again after the first hike in a decade earlier this month.

Sterling was up slightly on the day at $1.3186, having spent this month in a tight $1.30 to $1.32 band. Against the euro, it was 0.2 percent up at 89.23 pence, still close to Wednesday’s trough of 90.14 pence.

“The data is not going to be a game changer as it is all about Brexit negotiations at the moment and sterling is going to be trading in a tight range until we see further clarity on that,” said Viraj Patel, an FX strategist at ING in London.

British retail sales recorded their first year-on-year decline since 2013 last month, despite solid growth in volumes from September, as households battled with fast-rising prices.

Data on Tuesday had put UK consumer price inflation at 3.0 percent in October, lagging expectations.

Wednesday’s numbers also showed the number of people in work in Britain fell by the most in more than two years in the three months to September, in the latest sign of weakness in Britain’s Brexit-bound economy.

Progress at a Brussels summit between European and British negotiatiors next month is seen as an important milestone in the Brexit talks, as businesses seek clarity by the new year when many will take investment decisions dependent on conditions.

“The pound has been undermined by a combination of softer UK economic data releases, heightened domestic political uncertainty and building Brexit concerns ahead of next month’s EU Leaders Summit,” wrote MUFG currency strategist Lee Hardman, in a note to clients.

“The pound is likely to prove sensitive to negative economic data releases in the near-term, given that the BoE has signalled that it is not in a rush to follow up their first hike from earlier this month.”

Reference: Saikat Chatterjee

Thursday, 16 November 2017

5 Tips for Trading During Volatile Markets

An Educational Article

Increased volatility leads many traders to seeing an increase in trading opportunities. The huge market swings trigger thoughts of monumental upside, but also for potential loss especially if traders do not take the necessary precautions. During times of volatility, traders need to adjust their strategy to compensate for erratic market. When trading during these market conditions, traders should follow the rules below.

1. Be More Selective Before Placing Trades
Wanting to take advantage of all the trading opportunities that present themselves in volatile markets, traders are tempted to place an increase number of trades. This temptation should be avoided. It is important to remember that in volatile times, losses are likely to be big. Before placing a trading, assess risk tolerance levels. Determine the level of risk that is acceptable for the trader both psychologically and financially before placing any trades.

2. Use Less Leverage
During high market volatility, losses can be traumatic. With the average trading range increased in volatile times traders should be considering how leverage will affect trades. At a one percent or even a half percent margin, investors should be mindful of how much leverage or even the size position being traded can affect their portfolio. In normal market conditions, placing a 2 lot position is fine when you are looking to make about 50-100 pips. During a more volatile time, when the potential loss is 100-200 pips, it stops being an effective risk to reward ratio. To compensate traders should look to taking on smaller trading positions, in this case only one lot as opposed to the average 2 lot position.

3. Trade with More Discipline
Traders should always follow their predetermined trading strategy regardless of market condition. During volatile markets, this is even more important to use that same level of restraint. Traders must adhere to any set stops, contingency plans or risk management benchmarks without hesitation. This will help to define how much risk is taken should price action be uncontrollable. Without this level of discipline and self control losses can be great.

4. Tighten Stops
Many traders are hesitant to use tighter stops in volatile markets because they see the large swings increasing the likelihood that the position will be taken out. Having tighter stops can also provide great risk managers in times of extreme volatility. For example, on a EURUSD trade, rather than setting an 80 pip stop to protect your position, consider placing a 50-60 pip stop. This will insure the protection of your currency position and if the stop is broken, there is a high likelihood that the trend will continue lower and the stop took you out before you could potentially lose more money.

The width of the stop being set does depend on the currency pair being trading as some pairs have wider ranges. In a Yen cross like the GBPJPY or AUDJPY, traders may be more likely to have wider stops as their average daily range is 50% more than that of the EUR/USD. With that said, stops during volatile market conditions should not as wide as before. Instead of a stop 100 pips below entry, traders may consider a 25 pip reduction and have a 75 pip stop. Below is a chart showing the EURUSD and the GBPJPY on the same very volatile day in the forex market. The EURUSD had an impressive range of nearly 600 pips! The GBPJPY far dominated though with nearly a 2000 pip trading range.

5. Be Prepared
It also helps a trader to know what is causing the current spate of volatility in the markets in order to be prepared for the unexpected. As such, an investor can accommodate their strategy to the market environment and not just the currency pair being traded. The first of these considerations is accounting for emotions in a market: is fear currently driving the market lower? Or is it buyer's mania that is keeping the bullish tone alive? Traders' overreaction and emotion tend to push markets to overextended targets. This fact alone creates volatility through simple supply and demand.

Volatility can also, and more than likely will, be sparked by economic events. In this instance, market participants may interpret fundamental data differently and not as cut and dry as the more novice trader. A perfect example of this is usually monthly manufacturing reports that are released in pretty much all industrial economies. The classic scenario has the market honed in on a particular number for the month. However, traders young and old will sometimes wonder why the market sold off if manufacturing showed positive growth. The answer is simple. The market had a different interpretation and positions were violently reshaped and shifted. These tend to create great opportunities for some and horrible memories for others. 

Panic and erratic momentum can additionally be found in certain market environments. Not to be confused with fear or greed, panic selling and buying can create very choppy and relatively untradeable markets. These conditions will lead some to flip flop their positions while leaving others gaping at the fact that the position was right, only to be stopped out prematurely. These two common examples will create further panic and volatility as traders abandon their own individual strategy for the possibility of instant profits or stoppage revenge. As a result, a vicious cycle of volatility ensues until a definitive market direction can be established.

The simple rules above, and a task of getting to know the current trading environment, can empower every trader through the ranks. Although some relate volatility with difficult and untouchable markets, opportunities continue to remain abound in these less than attractive conditions to those focused and fortunate.
By following these five simple steps, trading in volatile market conditions should be a little simpler. Don't forget to adjust leverage based on volatility, follow your trading plan, tighten your stops and know why you are getting into a trade before you place it.

Reference: Richard Lee

Asia shares gain despite Wall St. weakness, dollar edges higher

TOKYO/SYDNEY (Reuters) - Asian shares shrugged off Wall Street losses and a lackluster start to rally on Thursday, while the dollar edged up as investors priced in more U.S. rate hikes after upbeat economic data.

“European equity traders will likely inherit a positive market,” Ipek Ozkardeskaya, analyst at London Capital Group, said in a note.

Futures portended solid openings for European bourses, with European stock futures up 0.3 percent, Dax futures up 0.4 percent, and FTSE futures and CAC futures each up 0.3 percent.

MSCI’s broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS was up 0.7 percent.

Australian stocks added 0.2 percent, with sentiment helped by data showing the country’s jobless rate dipped to 5.4 percent in October, its lowest since early 2013.

Japan's Nikkei reversed early losses and surged 1.5 percent as investors hunted for bargains after a six-day losing streak

EMini futures for the S&P 500 added 0.3 percent after major indexes dropped on Wall Street overnight, with the S&P 500 energy sector  suffering a four-day decline of 4 percent, its weakest such period in 14 months.

Investor concern over the progress of a massive U.S. tax reform plan showed no sign of abating as two Republican lawmakers on Wednesday criticized the Senate’s latest proposal.

“If we look at what the markets are focusing on, it’s still very much the tax cut debates in the U.S., and how much progress there’s going to be on this front,” said Mitul Kotecha, head of Asia macro strategy for Barclays in Singapore.

“Clearly, there’s some way to go before any deal is on the table, and I think markets perhaps may have reassessed some bullish expectations, and hence some of the dollar weakness yesterday, and probably the fact that the dollar has been unable to make up much lost ground today,” Kotecha said.

The dollar index, which tracks the greenback against a basket of six major rivals, was slightly higher on the day at 93.828. The euro was steady at $1.1791 EUR=, retreating from a one-month top of $1.1860 on Wednesday.

Against its Japanese counterpart, the dollar gained 0.2 percent to 113.04 yen JPY= after it sunk as deep as 112.47 overnight. But it remained well shy of its eight-month high of 114.735 hit last week as Japanese stocks pushed to multi-decade highs.

Doubts that the latest round of talks to overhaul the North American Free Trade Agreement would make much headway in the face of tough U.S. demands saw Mexico's peso MXN= sink to an eight-month low on Wednesday, though it steadied in Asian trade.

Mostly upbeat economic news added to expectations that the Federal Reserve would not only hike in December, which is now almost fully priced in, but multiple times next year as well.

Core U.S. inflation edged higher and retail sales beat forecasts in a positive sign for growth.

The rate outlook could push the two-year Treasury yields up further from its nine-year peaks, after the yield curve hit its flattest in a decade.

Investors also suspect this tightening will slow the U.S. economy and stop inflation ever getting to the Fed’s 2 percent target, pulling down longer-term treasury yields. As a result the gap between two- and 10-year yield has shrunk to its thinnest premium since late 2007.

“Whether it is the flattest yield curve in a decade, and what that has historically signaled for future growth, the recent troubles in high-yielding credit or lingering geopolitical tensions, it is not entirely clear what has markets spooked,” ANZ analysts wrote in a note.

In commodity markets, gold XAU= edged down 0.1 percent to $1,277.29 an ounce. It reached $1,289.09 overnight, its highest since Oct. 20.

Oil prices gained despite pressure after the U.S. government reported an unexpected increase in crude and gasoline stockpiles. They had lost ground to this week’s International Energy Agency (IEA) outlook for slower growth in global crude demand.

U.S. crude added 5 cents to $55.38 a barrel. Brent crude futures  were 15 cents higher at $62.02.

Reporting by Lisa Twaronite in Tokyo and Wayne Cole

Wednesday, 15 November 2017

Euro jumps to three-week highs as risk appetite returns

LONDON (Reuters) - The euro consolidated gains at a three-week high on Wednesday as investors grew optimistic about the single currency’s outlook with growing doubts about the prospects of the U.S. tax plan also underpinning gains.

With growth from the economic bloc exceeding the United States in the third quarter, led by economic powerhouse Germany, investors were becoming more comfortable in holding risky assets in Europe.

“The growth story in Europe is reasserting themselves and we are starting to see some doubts creep in on the prospects of the U.S. tax plan,” said Timothy Graf, head of macro strategy EMEA at State Street Global Markets in London.

The single currency EUR punched through a key technical level of $1.1734 on Tuesday and extended gains on Wednesday to rise 0.4 percent at $1.1853 against the dollar.

On a two-day rolling basis, the euro was set to stage its biggest rise in nearly six months.

Over the last few sessions, unhedged purchases of European stocks have picked up noticeably after declining in October.

The euro’s gains was also partially a dollar weakness story as the single currency’s gains was largely muted against the crosses, especially the Japanese yen EURJPY=

The euro’s gains were also bolstered by concerns that an ambitious U.S. tax plan may face headwinds even as financial markets have priced in more interest rate hikes next year.

U.S. Senate Republicans on Tuesday linked repealing a key component of Obamacare to their ambitious tax-cut plan, raising new political risks and uncertainties for the tax measure that financial markets have been monitoring closely for months.

The dollar index fell 0.3 percent to 93.553 on Wednesday as investors awaited U.S. consumer inflation data for October,later on Wednesday.

“The dollar is getting hit against the euro and the yen and the strong data out of Europe is definitely a factor with some investors bailing out of the long dollar trade,” said Alvin Tan, an FX strategist at Societe Generale in London.

Reference: Saikat Chatterjee

Global Forex code bans 'last look' trading tactic

LONDON (Reuters) - A controversial trading tactic used on the $5 trillion (£3.78 trillion) a day foreign exchange markets has been banned by a global committee of central bankers and industry officials.

The Global Foreign Exchange Committee said on Wednesday it had concluded that traders should not undertake trading activity that uses information from a customer’s trading request during the “last look” window.

“Last look” refers to the ability of dealers to reject a trade at the last minute. Critics say traders could potentially abuse this by using the market intelligence gained to influence other trades.

The committee said the decision would be reflected in a revised version of its code that was launched in May in response to banks being fined billions of dollars for rigging currency benchmarks.

The committee said it had also agreed to clarify conditions under which certain trading arrangements could be distinguished from “last look”.

“The GFXC has made a number of decisions that will help to strengthen and embed the Code across the global market,” the committee’s chair, Chris Salmon, said in a statement.

Salmon, who is executive director for markets at the Bank of England, said in September the code may need tweaking.

Reporting by Huw Jones