#3 – PREMIUM SERVICE
08.02.2014<b> </b>

<b><span style="text-decoration: underline;">1. INTRODUCTION:</span></b>

Well, that was a very difficult week to understand at times.

The three major news events in the week that interested me had me a little confused and perplexed:

<span style="text-decoration: underline;">RBA Interest Rate Announcement and Statement:</span>

Interest rates were left unchanged, this was strongly believed to be what would happen so there were no surprises but I found the policy statement a little confusing.
For the past few months RBA Governor Stevens had been talking down AUD strength and even went so far as to say that an exchange rate level of about 0.8500 would be a reasonable level as far as the Central Bank was concerned.
Now we witness an about turn, we are all bullish again, and things were maybe not so bad as we had been saying for the past few months. The comment in the press release regarding currency guidance has now been removed.
The result on this RBA “Hallelujah moment” (positive view) was that the AUD/USD rallied from near critical support levels of 0.8660 back towards 0.8900.
This move offers up the potential for some great entries short again in the near future if the equities markets sell off.
The downside of this change in RBA sentiment from a personal viewpoint were that my FUNDAMENTAL AUD and NZD (in sympathy) cross-rate trades, were whacked across the board, and I decided to exit with losses.

<span style="text-decoration: underline;">ECB Interest Rate and Press Conference:</span>

Once again I found the market reaction to Draghi’s comments a little strange to say the least. I am commenting later in the blog about this particular news event.

<span style="text-decoration: underline;">U.S. Non-Farm Payrolls:</span>

Another big miss, that’s two months in a row. As usual with NFP there is an instant ‘Knee-jerk” reaction probably in line with your thinking……then it turns and runs off in the opposite direction. It did exactly this once again, futures took a poor number on the chin and then they rallied back hard to end the day 23.59 points (1.33%) positive.
If you get suckered into move it can be very costly. I tweeted several times across both ‘Twitter Accounts” not to get suckered. I hope that you didn’t.
So the big question is of course, is the U.S. economy as strong as we are being told and is the FED on its tapering course no matter what because the cost of an expanding balance sheet through QE is having minimal effect and we are in economic terms seeing a decreasing returns to scale. By that I mean, what has QE (Quantitative Easing) actually done apart from give the greed of Wall Street support. What has it done for unemployment and housing?

The ramifications of two jobs misses will be debated for the next few weeks…watch this space.

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<b><span style="text-decoration: underline;">2. TRADING SUMMARY:</span></b>
<p align="center"><b><span style="text-decoration: underline;">RADAR, FLASH and FUNDAMENTAL TRADES</span></b></p>
<p align="center"><b><span style="text-decoration: underline;">FEBRUARY 2014 and YEAR to date:</span></b></p>
It was a great start to the week and with primary market moving data towards the end of the week I traded less and basically observed. So on a pure volume of trades basis it was quiet.

The big news was that I exited all the FUNDAMENTAL trades and took losses. I hedge these, and, I am going to write about my approach to hedging in next week’s blog. My reason for exiting with hedging in place was that because they are commodity cross-rates I hate the way the overnight swap costs rise and I was looking at market sentiment changes that could be around for the coming weeks.  With my longer-term trades I like to have momentum behind me. I never did with any of the trades involved.

Below I show the up to date performances for my various trading styles. Full excel spreadsheets are in the subscriber area of the PREMIUM SERVICE.

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<p style="text-align: center;"><b><span style="text-decoration: underline;">RADAR TRADES:</span></b></p>
<p align="center"><b><span style="text-decoration: underline;">PROFITS FROM SINGLE LOT COMPLETED RADAR TRADES:</span></b></p>
<p style="text-align: center;"> 1 x MICRO-LOT:
8 trades at $0.10 cents each = $0.80 cents risk for a $11.90 profit.</p>
<p style="text-align: center;"><span style="line-height: 1.5em;">1 x MINI-LOT:
</span><span style="line-height: 1.5em;">8 trades at $1.00 each = $8.00 risk for a $119.00 profit.
</span></p>
<p style="text-align: center;"><span style="line-height: 1.5em;">1 x STANDARD LOT:
</span><span style="line-height: 1.5em;">8 trades at $10.00 each = $80.00 risk for a $1,190.00 profit.</span></p>
<p style="text-align: center;"></p>
<p style="text-align: center;"><b><span style="text-decoration: underline;">FLASH TRADES:</span></b></p>
<p align="center"><b><span style="text-decoration: underline;">PROFITS FROM SINGLE LOT COMPLETED FLASH TRADES:</span></b></p>
<p align="center">1 x MICRO-LOT:
4 trades at $0.10 cents each = $0.40 cents risk for a $8.30 loss.</p>
<p align="center">1 x MINI-LOT:
4 trades at $1.00 each = $4.00 risk for a $83.00 loss.</p>
<p align="center">1 x STANDARD LOT:
4 trades at $10.00 each = $40.00 risk for a $830.00 loss.</p>
<p style="text-align: center;"></p>
<p style="text-align: center;"><b><span style="text-decoration: underline;">FUNDAMENTAL TRADES:</span></b></p>
I took some real hits (losses) on the trades in this section this month. Please bear in mind my maximum trade size in this area was 3 x micro-lots. The trade sizes are small because the trades were set up to be long term and the trade size is small because of the currency pairs involved. They are all huge daily ATR pairs.
<p align="center"></p>
<p align="center"><b><span style="text-decoration: underline;">PROFITS FROM SINGLE LOT COMPLETED FUNDAMENTAL TRADES:</span></b></p>
<p align="center">1 x MICRO-LOT:
4 trades at $0.10 cents each = $0.40 cents risk for a $49.40 loss.</p>
<p align="center">1 x MINI-LOT:
4 trades at $1.00 each = $4.00 risk for a $494.00 loss.</p>
<p align="center">1 x STANDARD LOT:
4 trades at $10.00 each = $40.00 risk for a $4,940.00 loss.</p>
<p align="center"></p>
<p align="center"><b><span style="text-decoration: underline;">COMBINED FLASH, RADAR AND FUNDAMENTAL TRADES PROFIT PERFORMANCE</span></b></p>
<p align="center"><b><span style="text-decoration: underline;">JANUARY 2014…SO FAR:</span></b></p>
<p align="center">TRADING MICRO-LOTS:
16 trades at $0.10 cents each = $1.60 risk for a $45.80 loss.</p>
<p align="center">TRADING MINI-LOTS:
16 trades at $1.00 each = $16.00 risk for a $458.00 loss.</p>
<p align="center">TRADING STANDARD LOTS:
16 trades at $10.00 each = $160.00 risk for a $4,580.00 loss.</p>
The above examples are for illustration purposes only:

The profitability examples detailed above are based solely upon single lot trading, regardless of lot type. If multiple lot sizes are traded the profitability margins will be different than those shown.

Just to provide more information so you understand where I am coming from with the risk / reward statements above. All of my trades are of different sizes and different size lot types. The above does not reflect the actual trading performance. I like to add to trades, profits are taken as the trade progresses and my overall cost average moves several times. All of my trades are of different lot styles. I trade a mixture of micro lots, mini lots and standard lots across my brokers.

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<b><span style="text-decoration: underline;">3. THE FUNDAMENTAL TRADERS OVERVIEW:</span></b><b> </b>
<p align="center"><b>DESPITE THE FACT DRAGHI DID NOTHING NEW TO HELP
THE EUROZONE PERIPHERY OR TACKLE DEFLATION THE EURO RALLIED!</b></p>
Another classic ECB press conference; I am now of the opinion, and maybe I am the last person to acknowledge this, but it’s not about what Draghi says, it’s more about what he doesn’t say.

Holy mother of God, the Eurozone is suffering from DEFLATION. Eminent European economists are talking about it quite openly now. Not only does Draghi ignore DEFLATION, he’s sh** scarred to even utter the word, he uses DIS-INFLATION instead. Does he think we are nuts? It is what it is!

Last Thursday just prior to Draghi pulling up his chair to the table the EURUSD was trading sub 1.3500. By the time the press conference was completed it rallied from sub 1.3500, through 1.3500 and 1.3600 towards 1.3620…wowie!!

Is everything in the Eurozone just fantastic?

To be fair, some data has improved and Draghi acknowledged the positive encouraging signs in the areas of recovery and the modest pickup in consumer demand, rise in confidence and stable savings rates across the Eurozone.

As far as was concerned, or did I miss this news? Isn’t the Eurozone in a bias to ease mode? In the press conference Draghi never mentioned ‘Emerging markets” concerns, worries about inflation, basic monetary conditions or the general pathetic Eurozone economic outlook. Having examined his comments last month and compared them to this latest presentation they were pretty much the same. All I can think is that the EUR bears just looked on as Draghi ignored worries about Eurozone growth and inflation; hence the rally.

I think Draghi’s very modest referral to a more positive outlook just took the EUR/USD through 1.3600.

Draghi still talked about the future concerns in the Eurozone being inflation or unwarranted market tightening as being triggers for further additional monetary actions from the ECB. The bottom line I suppose was he made it clear that the ECB was in no rush to increase any stimulus and he is no closer to easing, these things alone were probably enough to send the EUR higher.

The elephant in the room at the press conference is DEFLATION. Every economist is so scared of saying that the Eurozone is in DEFLATION for fears of the Eurozone mirroring what happened in Japan.

The best quote I found during the week was from Gilles Moec, chief European economist at Deutsche Bank.
<p align="center"><i>“We don’t know if we’re in deflation now, but we cannot afford to take the risk. The problem is that it’s very hard to know you’re in it, and usually when you do, it’s too late. That’s what Japan found”</i></p>
The Eurozone consumer prices were 0.7% higher in January (year on year) which matched the record low from October 2013. The ECB target is just below 2%. Why the big fear?

If a lack of inflation (DEFLATION or disinflation) takes hold, it leads to a decline in the following, the general level of pricing, it undermines growth, it has an effect on and lowers corporate earnings and it effects asset values, like real estate. If economies are burdened this way as pretty much all of the Eurozone is, DEFLATION can drive a downward spiral, in which borrowers are bankrupted by their inability to repay loans on assets that have dropped in value. It’s a nightmare. This happened in Japan, where land prices fell dramatically since the early 1990’s with catastrophic consequences for banks and companies, never mind ordinary individuals.

Inflation basically erodes the real value of loans, making it easier for borrowers to repay, DEFLATION does the opposite. It places stress on banks. Do you think all the Eurozone banks are ready for DEFLATION? Why is yet another bank stress test on the way?

Whichever way you want to view this, Greece and Cyprus have been issuing price declines, and Portugal, Spain and Ireland are not that far away from zero. Even the Eurozone power-house Germany is haunted as prices there rose just 1.2% last month (year on year).

However, Draghi did nothing to address DEFLATION concerns. He has said in the past that the ECB would consider all the tools at its disposal to fight DEFLATION. But he has also said that there is nothing to fear. He line is “The risks of DELATION or inflation are limited at this point of time”.

Interesting…

Here is my list from last week’s blog on my view on the issues that the ECB still has to fix, a week on and having had a chance to do something nothing has been done: -
<p align="center"><i>UNEMPLOYMENT (in particular youth unemployment)</i></p>
<p align="center"><i>DEFLATION</i></p>
<p align="center"><i>BANK LIQUIDITY (yet another stress test is being planned)</i></p>
<p align="center"><i>BANKING STRENGTH (The long awaited banking union)
PERIPHERY GROWTH
RESTORE MARKET CONFIDENCE IN HOUSING MARKETS</i></p>
I still think that a Eurozone crisis is needed to bring matters to a head.

A crisis will add fuel to USD strength and drive the EUR/USD towards 1.3000 and possibly below.

Draghi, with Merkel (in Berlin) pulling his strings will procrastinate and say things are in-line with expectations. The backdrop is Germany has the chequebook and does not want the invoices to fix the Eurozone as well. I totally get it.

As a trader I want a Eurozone crisis….

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<b><span style="text-decoration: underline;">4. TRADER TOPICS:</span></b>

As requested I am using this section this week to talk about the various uses of ATR’s in trading.
<p align="center"><b><span style="text-decoration: underline;">ATR (AVERAGE TRUE RANGE)</span></b></p>
<p align="center"><b><span style="text-decoration: underline;">HOW I USE IT TO PLACE FUNDAMENTAL TRADES</span></b><b> </b></p>
Before looking at how I use the ATR, it may be of some use to define what the ATR is.

The Average True Range (ATR) indicator is a simple tool but is very useful in measuring volatility. In very simple terms, the ATR measures the price range of a currency pair (it could also be a stock or any security) so that the higher the volatility of the currency pair the higher the ATR.

The ATR is measured as the greatest of any of the following 3 metrics:
<ul>
	<li>The current high minus the low.</li>
	<li>The value of the current high minus the previous close.</li>
	<li>The value of the current low minus the previous close.</li>
</ul>
Whichever is the highest of these three metrics is then represented as the average true range of the currency pair. Typically, the number is then smoothed using a 14-day moving average.

Finding the average range of a currency pair has a number of important implications that can help make better trading decisions.

The best example is for POSITION (FUNDAMENTAL) trading. These are trades intended to be of a very long-term nature.

There are a number of uses for the ATR as well as for my FUNDAMENTAL trade set-ups and I will add these as well.

I have listed four ways below of how to use the ATR as a support indicator when placing a trade, or use it effectively when you are already in a trade.

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<b>1. How I use the ATR when placing a FUNDAMENTAL trade:</b>

As my approach for FUNDAMENTAL trades is from of a longer-term perspective, I look at the “Monthly ATR” for the currency pairs that I am interested in trading.

The background to my trades from my existing fundamental view is that equities are going to roll over and sell off and at the same time commodity currencies are going to weaken such as AUD, NZD and CAD.

Keeping things very simple, which is what I try to do. I am going to use my existing live trades as examples.

Firstly, I look for Fibonacci levels for entries in conjunction with pivot points. Once I have those levels analyzed, I look at my currency pair establish how much I am prepared to risk in the trade and what type of lot I will use and determine what quantity I will buy or sell based upon my proposed entry and stop loss levels.

As I have written, many, many times in my blogs certain currency pairs are very volatile and smaller trade sizes should be used to cope with and absorb the wild moves associated with such pairs. The ATR gives you a fantastic lead in connection with this.

Additionally, you can hedge any trades to give you another layer of protection given their longer-term nature. The potential for huge swings before your trade takes shape in the chosen direction is always there and hedging limits both your risk and exposure. (Hedging will appear as a future discussion topic in the TRADER TOPICS section)
<p align="center"><b>GBP/NZD
Entry Level: 2.1090
Monthly ATR = 850
ATR Stop: 1.9340
“My Stop” placed on the trade: 1.9500</b></p>
As you can see I have room to move the stop if I want to meet the ATR indicator levels, should I decide that I want to.

You must realize with such huge stop loss levels in place, an appropriate trade size should be set accordingly.

As an example, and, all my trades above are around these lot sizes: -

GBP/NZD:
Potential loss 850 pips.
Trade size at outset 2 x micro lots (850 x $0.20) = $170.00 risk.

If I did not alter the lot size or the limit and the trade hits my limit/ target of 2.1200.
Trade size 2 x micro lots (1,010 x $0.20) = $202.00 reward.

Obviously, when the trade is profitable I would add lot sizes and move / adjust my limit accordingly. I would add lots and take profits along the way to my profit target. As a minimum I would be looking for a 2:1 ratio.

They key is closing your hedge trade in the opposite direction at the correct time to maximize profitability. It is not that straightforward at times.

There are other uses for the ATR that are more traditional.

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<b>2. Using the ATR to trade volatility:</b>

The ATR can be used as a trading signal in its own right.

Let’s say that you are watching a market for a number of days and you have noticed that volatility has dropped significantly from its historical average. Since low periods of volatility often precede explosive moves in either direction, you could wait for the ATR to increase and place a trade in the direction of the move.

Crossovers can also be used. For example, placing a trade when the fast ATR (e.g. 14 period) crosses over a slower ATR (e.g. 100 period). This can be an effective breakout volatility strategy.

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<b>3. Using the ATR for profit targets:</b>

For day traders, knowing the average range of a currency pair is extremely useful since it allows you to estimate how much profit potential there is in the market.

For example, there is no point looking for 150 pips of profit from a trade in the GBP/USD, if the average range for that market over the last 14 days is only 80 pips. You will simply end up waiting for profits that do not come and will likely end up losing money.

A better solution is to halve the 14-day ATR and use this as your profit target. In other words, after entering a trade in the GBP/USD as above you can give yourself a profit target of around 40 pips. This is a much safer way to trade.

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<b>4. Using the ATR as a filter:</b>

The average true range is also a good indicator to use for filtering out trades.

Traders typically need volatility to make any money so if you have a system that generates lots of different signals; you can filter out those currency pairs that are low in volatility by discarding those with a low ATR. Concentrating on currency pairs with the highest ATR’s mean you can trade the markets that are experiencing the most movement and therefore the most profit potential.

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<b><span style="text-decoration: underline;">5. MY CURRENT LIVE TRADES:</span></b>
<p style="text-align: center;"><b><span style="text-decoration: underline;">FLASH TRADES:</span></b></p>
<p style="text-align: center;"><strong>FT23</strong>
<strong>AUD/CAD</strong>
<strong>Long</strong>
<strong>Cost Average: 0.9891</strong>
<strong>Stop Loss: 0.9400</strong>
<strong>Limit / Target: 1.0400</strong>
<strong>My Position Size: 10%</strong>
<strong>Closing Weekly Position:0.9882</strong>
<strong><span style="line-height: 1.5em;">My present Profit/Loss position:  -13pips</span></strong></p>
<p style="text-align: center;"><strong>FT24</strong>
<strong>USD/CAD</strong>
<strong>Long</strong>
<strong>Cost Average: 1.0989</strong>
<strong>Stop Loss: 1.1011 (Protected Stop)</strong>
<strong>Limit / Target: 1.520</strong>
<strong>My Position Size: 40%</strong>
<strong>Closing Weekly Position: 1.1032</strong>
<strong><span style="line-height: 1.5em;">My present Profit/Loss position:  +43pips</span></strong></p>
<p style="text-align: center;"><strong><span style="text-decoration: underline;">RADAR TRADES:</span></strong></p>
<p style="text-align: center;">No live RADAR TRADES at the present time.</p>
<p style="text-align: center;"><b><span style="text-decoration: underline;">FUNDAMENTAL TRADES:</span></b></p>
<p style="text-align: center;">No live FUNDAMENTAL TRADES at the present time.</p>
<b><span style="text-decoration: underline;">6. TRADES THAT ARE ON MY RADAR:</span></b>

I have the following two RADAR trades that I will be placing with my brokers on Sunday evening (09.02.2014). There are other trades and I will add these on Monday should the consolidation take place that I think will happen.
<p align="center">USD/CHF
Long
Entry Level: 0.0.8960
Stop Loss: 0.8880
Limit / Target: 0.9250</p>
<p style="text-align: center;">EUR/AUD
Long
Entry Level: 1.5235
Stop Loss 1.4950
Limit /Target 1.5450
<b style="line-height: 1.5em;"><span style="text-decoration: underline;">PLEASE NOTE</span></b><b style="line-height: 1.5em;">:</b></p>
<p align="center">(If you are contemplating this trade which traces an inverted
“Head and Shoulders” pattern on the 60 minute chart. Please take smaller positions to cope with the volatility that could be involved with this trade)</p>
<b><span style="text-decoration: underline;">7. LOOKING FORWARD…THE KEY SUPPORT &amp; RESISTANCE LEVELS WITH THE USD MAJORS:</span></b>

<b>EUR/USD: Closing Price 1.3634.</b>  Despite all the shenanigans during the week we ended only 40 pips lower than last week. We had a major sell off and two bullish events and we still did not break the trading range of 1.3475 to 1.3650, although we are very close to resistance. Early next week we should know if we are are we heading back towards 1.4000 or aiming lower towards 1.3000. This pair holds the key to the currency moves ahead. I really hope that these trading ranges will break soon; it is becoming a little boring. The S&amp;P needs to hold resistance at 1800. At this level I think that there is a good chance that we turn lower once again

<b>GBP/USD: Closing Price 1.6410.  </b>I have very similar comments regarding cable as I just wrote about the EUR/USD. We saw about a 60 pip reduction in the past week.  At the start of the day on NFP (Friday) I had in mind that a short at around 1.6400 in cable would be a good entry. We will have to wait into the start of next week to re-assess the position. The next stopping point upwards is 1.6500-1.6520 and support lies at 1.6250. I may well issue a FLASH trade tweet about cable short early next week. Recent economic data from the UK has been rather muted and it looks like a downside move may be on the cards once the bullishness of NFP is out of the way.

<b>AUD/USD: Closing Price 0.8958</b>.  I think that we are in a bullish trend at the moment with this pair. I am viewing this move as just a better entry price to head lower once again. Equities will have a lot to say about the future moves I think. Should the S&amp;P rollover at 1800 the AUD/USD should follow. Looking at the charts I think that we may see a run to the psychological 0.9000, maybe resistance as high as 0.9200. Big support is at 0.8876 and then below at 0.8750.

<b>NZD/USD: Closing Price 0.8293</b>.  Probably in sympathy will the AUD/USD this pair has held up very well in the past week. Like the GBP/USD just before NFP, I had in my mind that 0.8300 would be a great area to look to short. Once again early next week there could be a FLASH trade alert on this pair.  In addition and like the AUD/USD, equities will point us in the correct direction with regards to this pair. At the moment, I think we may test levels a little higher towards 0.8400. Support is really good at 0.8185.<b> </b>

<b>USD/CAD: Closing Price 1.1032.</b>  I think that the CAD currency is quite weak at the moment and should we break out through 1.1125; we should see 1.1200 pretty soon. Support is good at 1.0950.

<b>USD/CHF: Closing Price 0.8982</b>.  We are bouncing around in a range of 0.9850 to 0.9080. We need this range to break to give us direction. I think that it is pointless looking at this pair to trade at the moment.

<b>USD/JPY: Closing Price 102.31. </b> With all the movement, we only moved down one pip in the week! We have however consolidated at a lower level and this fact should not be missed. Moving forward the range is basically what it has been all week 101.75 to 102.80.

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<b><span style="text-decoration: underline;">8. MAJOR FOREX NEWS THIS WEEK THAT INTERESTS ME:</span></b>

SUNDAY: N/A

MONDAY: N/A.

TUESDAY: USD – Janet Yellen testifies

WEDNESDAY: GBP – BOE Carney speaks &amp; BOE Inflation Report
WEDNESDAY: EUR – Draghi speaks.
WEDNESDAY: AUD – Unemployment Rate.

THURSDAY: USD – Core Retail Sales &amp; Retail Sales and Janet Yellen testifies.
THURSDAY: CNY - CPi

FRIDAY: CAD – Manufacturing Sales.

<b><span style="text-decoration: underline;"> </span></b>

<b><span style="text-decoration: underline;">9. FINAL THOUGHTS:</span></b>

I am expecting consolidation early next week. So, with that in mind, always, always remember that there is a market everyday. You do not need to trade everyday to make your financial goals.

Good luck and trade within your TRADE PLAN guidelines and most importantly use MONEY MANGEMENT SKILLS to control your risks.

Scott Pickering
The Pip Accumulator
Saturday February 8th 2014

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