The markets tend to be in a good mood the week before holidays, since 1950, the S&P 500 is 40-19, up 67.85 of the time during the four day week (including Friday) of Thanksgiving for an average gain of 0.78%

On average, all of those gains come on the two days surrounding Thanksgiving, which are 51-8, up 86.44% for an average gain of 0.80%.

For a bit extra detail give the post a look.

Of course the stock market isn’t the only thing with seasonal patterns this time of year. The forex market is full of them – and some very strong ones at that. You can learn about them at: www.theessentialsoftrading.com/resources/fxseasonals

Struggling with support & resistance and knowing what the key market levels are? Check out the Price Distribution Analysis methods I use.

September Seasonal Market Patterns

Forex Market Seasonal Patterns – Really!

Forex Seasonals?

Oh, Woe is Me!

Am I using the right indicators for my trading strategy?

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Source: Euromoney FX survey FX Poll 2009

According to that same survey, the daily volume of forex trading breaks down like this:

• Western Europe 50.19%
• North America 26.98%
• Asia 14.54%
• All others 8.39%

Here’s something most folks probably don’t realize, however. According to a Financial Times article posted today, about two thirds of the $3.2 trillion in daily forex market transaction volume done each day is derivatives (see Most Active Forex Currency Pairs). That’s heavily in swaps. The focal point of that FT article is on the potential impact of new legislation requiring derivatives to be cleared through central clearinghouses.

It’s worth noting that the only bank in the ranking list above that does retail forex trading business is Deutsche Bank, which has the dbFX platform. The way I understand it, DB is a major liquidity provider to retail forex brokers. So the answer to the question of who is making prices in the forex market is Deutsche Bank.

Struggling with support & resistance and knowing what the key market levels are? Check out the Price Distribution Analysis methods I use.

Someone Else Slamming Forex

Forex Trading and Pricing Explained

Can you tell me where I can find free forex charts?

New NFA Retail Forex Leverage Restrictions

Trade Commodities without Trading Futures

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They are not worth reading. None of the wizards share any of their strategies. A complete waste of time in my opinion.

First of all, the statement that none of the wizards share their strategies is technically incorrect. William O’Neil from the first book is quite specific about his methods (you can also find it in his book How to Make Money in Stocks). I will admit that most do not specifically share their methods, but some of those can be found in other sources. For example, the Turtle system employed by Richard Dennis (first book) can be found in Way of the Turtle. Furthermore, many of them trade in a discretionary fashion not readily quantified.

That is so not the point, though.

I see the attitude of this emailer in trading book/product reviews all too often. For some reason these individuals think a book which doesn’t lay out a specific trading system or methodology is useless. This is a foolish, narrow-minded viewpoint. In fact, I’ll turn that thought process around.

Trading systems outlined in books are worthless (at best – very costly at worst) to the vast majority of traders.

Why do I say that? For the very simple reason that most trading systems won’t work for most people. I’m not saying the systems are not, or cannot be, profitable. They just have specific timeframes or markets or risk characteristics which are suitable to only a relatively small number of traders. What works very well for one person won’t work nearly as well for most other people because we all come at the markets differently.

The value to be found in books and other educational resources is not in specific trading systems and like. It’s in how the resource guides us in the development of our own unique way of taking on the markets. The reason I always recommend the Market Wizards books is that the allow the reader to benefit from the experience of a group of highly successful traders, ones who had to overcome many of the hurdles we all face on our development path. In their interviews they share how they did that.

I know my own development as a trader (and eventual professional analyst) was seriously accelerated by reading the Market Wizards books. I was able to understand from their experiences the pitfalls I should watch out for and where there might be opportunities for me to pursue things. In that way they gave me much more than I would have ever gotten from some trading system.

(P.S.: If you haven’t already had the opportunity to see/hear Market Wizards author Jack Schwager speak about what he took away from those he interviewed for the books, then I suggest you check out Market Wizard Insights, available at no cost here.)

Struggling with support & resistance and knowing what the key market levels are? Check out the Price Distribution Analysis methods I use.

Is the Turtle Trading System a Good One?

Book Review: Way of the Turtle

My Top 5 Trading Books

Book Review: Trend Following

Trader’s Wish List – Second Installment

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Jack periodically does seminars on the subject of the lessons to be learned from the Wizards. I’ve had the opportunity to see them on a couple of occassions. Obviously, there’s a lot of overlapping content from the books, but it’s more than that. Jack is a very good speaker and in his seminars he presents in a really accessible way the lessons and themes he’s learned from the traders and money managers he sat down with.

If you haven’t already had the opportunity to see/hear Jack speak, then I suggest you check out Market Wizard Insights, available at no cost here.

Struggling with support & resistance and knowing what the key market levels are? Check out the Price Distribution Analysis methods I use.

Book Review: The Complete TurtleTrader

Trading Education is Not Just About Trading Systems

Book Review: Trend Following

Stock Picking 101 and Some Other Stuff

Book Review: The Daily Trading Coach by Brett Steenbarger

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I do have a question regarding the money maker and rapid price swings in equity prices. I understand /why /it happens but not /how./ It is the money maker who actually ticks the quote number up or down correct? It would make complete sense to me if there were only limit orders, where buyers indicate the max price they will pay and sellers indicate the min price they will accept. The money maker would simply have to match buyers to sellers. But with the market orders, it seems to me that the money maker is given a lot of freedom to change the price very quickly based on the volume of buyers and sellers at any given time. And I think that, in part, is what can drive prices up or down very quickly. The money maker makes his money on volume of transactions, not the price of transactions.

Then there are the instances of violent price swings immediately upon the market opening, based on good or bad news from the day before, after the market closed. My thoughts above apply, but the situation is a little different because the change in price tends to be almost instantaneous whereas the earlier case tends to happen over a few minutes or hours. I believe what happens is a large volume of automatically executed trades by people who had previously set up stop-limit or stop-loss orders. That triggers the immediate fall or rise in price and then rest of the market kicks in to react. The media is quick to report the violent price swings and the public then gets bullish or bearish real quickly. There are some more experienced traders who explicitly buy/sell on ups/downs. But something would still have to make the price rise or fall by say 10% to set the trigger. The initial rise or fall is probably from market order trades and then the fall/rise is sustained by a large volume of automated orders.

What do you think? After writing my piece above I have it worked out that the price swings are initially driven by freedom given to the money maker by those who execute market order trades.

First, I’m pretty sure that by “money maker” Ben means market maker. I can’t help but chuckle about the truism behind the error, though.

On the subject of the cause of initial price gaps at the open of trading, let me first say that there is overnight or pre/after-hours trading in so many stocks these days that what we may see on gaps on the daily chart of exchange-fed prices isn’t really a gap. It’s more like the reflection of a time break. Think of how an intraday chart would look if you didn’t show the trading that took place between 11:00 and 1:00. Chances are there would be a gap.

Now in the case where exchange trading is the only trading, it’s a question of price matching. The market maker (or specialist) looks to all the orders which have collected overnight and in the pre-market to come up with an initial price which best clears the market. That means the point at which the volume on the buy and sell side will most effectively match up. Of course from there the opening price will then impact standing order, causing knock-on reactions off that starting point.

As Ben noted, market makers make their money mainly from buying at the bid and selling at the offer. The more they do that the more money they make, so it behooves them to set their price at the point where most volume is going to transact. You can think of price movement as the continuous process of market makers adjusting the bid/offer to try to maximize volume. After all, it doesn’t make much sense to keep price at a point where no trades will get done.

Struggling with support & resistance and knowing what the key market levels are? Check out the Price Distribution Analysis methods I use.

Price Movement Causality – Not What You Might Think

Some Not-So-Great Tips for Using Stop Orders

How do market makers adjust prices?

A Reader’s Story About a Stop Getting Hit

How to identify price targets for your trades

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However, it is important to note that forex trading is rather risky, and the currency market is quite volatile.

All trading is rather risky, so I won’t address that particular point. I will, however, speak to the issue of the currency market being quite volatile. Statements about the forex market being more volatile than others are made all the time – almost always be folks who are putting forex trading down in some fashion or another. As I’m going to show you, the numbers make it pretty clearly that forex is in fact on the low end of the volatility scale when looking at all markets.

Here is a look at the last year worth of volatiliy in forex rates

The first column is the standard deviation (a commonly used volatility metric) of the daily % change for the one-year period beginning November 1, 2008. The second column is the average daily range, with each day’s range being expressed as a % of the prior day’s close ( [H-L]/C ). I went with % changes and ranges to make things directly comparable across markets. So from this data we can see that USD/CAD tends to see the biggest daily changes, though GBP/USD tends to have slightly widers daily ranges.

Now let’s compare that to the major US stock indices.

Here we can see about what as we would expect in terms of the small cap Russell index being the most volatile in terms of both price changes and ranges.

And how about individual stocks?

All of the above are clearly large-cap stocks which would generally be expected to show less volatility than mid- or small-cap stocks (as witnessed by the higher volatility in the Russell index). Even still, with the exception of KO, they are all much more volatile than the forex pairs.

So what about commodities?

Again, the commodities are clearly much more volatile on a day-to-day basis than are forex rates.

Now to add in a market that’s considered the least risky by many folks – interest rates.

I’m using the futures for the prices above. Finally we have a market where volatility is lower than forex! As you can see, the shorter maturity instruments (Eurodollars are 3mo) are calm compared to the others we’ve looked at here. Bonds, though, are in line with the volatility readings we see for the forex pairs.

So the bottom line is that not only are forex prices NOT the most volatile, they are actually on the lower end of the spectrum when looking at available markets. The numbers demonstrate it pretty clearly, even in a 12-month period which has seen its fair share of volatile trading.

Now granted, the application of leverage in forex creates the oppotunity for very high levels of volatility in ones trading account – but that’s not the market’s fault. Traders don’t need to use leverage. You can trade forex without it.

Struggling with support & resistance and knowing what the key market levels are? Check out the Price Distribution Analysis methods I use.

Looking at volatility, historically speaking

Volatility Pointing at More Stock Market Upside

How Do I Find Good Trades?

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Interest Rates and PE Ratios

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Euro = 57.6%
Japanese yen = 13.6%
British pound = 11.9%
Canadian dollar = 9.1%
Sweden krona = 4.2%
Swiss franc = 3.6%

In other words, the main driver of the Dollar Index is EUR/USD – even more so when you consider how closely correlated the euro and swiss franc are. That means the index can be skewed at different points as the EUR either over- or under- performs. That creates a potential opportunity to look for divergences between the two.

As you can see above, while the index and EUR/USD matched turning points in late 2005, they diverged at the more recent ones. That could have tipped you off that something was changing, just like looking at divergences in indicators or stock market internals.

The problem, though, becomes when looking at something beyond the euro, like USD/JPY.

Notice how relatively un-related the path of USD/JPY has been compared to the course of the index. That tells you there are other considerations involved here related to the yen which don’t reflect in the general dollar situation.

Being able to see the differences in how related markets trade can go a long way to help you make good trades.

Struggling with support & resistance and knowing what the key market levels are? Check out the Price Distribution Analysis methods I use.

Trading forex via the stock market

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Taking the Trader Positioning Data to the Next Level

Why are stocks and the dollar trading inversely?

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The government and central banks speakers, however, are a different story. As I noted to someone in an exchange a short while ago, they may not generally be price makers, but they are definitely price influencers. And I’m not just talking about what they say. What they do is even more important. That’s what I want to speak to here.

I’m going to pick on the US Treasury Secretary – not specifically the current one, but pretty much the whole string of them. How many times have you heard some version of “we want a strong dollar” coming out of that office? It’s like a mantra, isn’t it. They say it all the time. They might even actually believe it most of the time.

Here’s the thing, though, things have priorities. The goverment might actually want the currency to be strong, but that may or may not be high on the priority list. In fact, most of the time there are things the politicians rate more important. That’s why you get the dollar falling when the Treasury Secretary making strong dollar comments.

It all comes down to what they are actually doing. Things like running big government deficits is generally something that will weigh on a currency. Relatively low interest rates will tend to do the same. Changes is taxes or regulation or trade policy can also impact the relative attractiveness of one currency against others.

I think we all know intuitively that more attention should be paid to actions than words, but sometimes that can get forgotten in the heat of the moment when the market is reacting (or not reacting) to news. If there seems to be a disconnect between what some talking head is saying and what’s being done, always go with the latter.

Then too there’s the fun times when there are conflicting comments. That has been the case with the UK in second half of this year. Members of the Bank of England made some pretty clear comments over the summer about the attractiveness of a lower pound. They were in the middle of their quantitative easing program, which was a natural drag on the currency’s value. A couple of months ago, though, several voices from within the government tried to counter “weak sterling” comments saying the BoE really wasn’t looking to weaken the currency. At no point, however, did anyone from the central bank actually say that. As a result, and lift sterling got from the “positive” government comments was quickly erased.

All of this falls under the category of good fundamental analysis. It’s not just looking at numbers. It’s also about understanding what the policy makers are doing, or intending to do, as they are big influencers on trends.

Struggling with support & resistance and knowing what the key market levels are? Check out the Price Distribution Analysis methods I use.

Forex Trading and Pricing Explained

What does it mean to drain reserves from the short term money markets?

Why are stocks and the dollar trading inversely?

Track Market Sentiment to Understand Price Cause and Effect

The Dominant Players in Forex

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Technical Analysis of the Financial Markets is widely considered the bible of technical analysis. Author John J. Murphy is one of the market luminaries. He was highly respected during his years working on television in the early days of CNBC (he overlapped with John Bollinger), especially in being the main pioneer of inter-market analysis. If you’ve been following my posts here for any length of time you will probably have picked up on the fact that inter-market analysis is a major part of what I do in my daily work. John is currently the Chief Technical Analyst for StockCharts.com. I personally consider him one of the best in the business and remember eagerly awaiting his segments when I was a young trader and analyst.

Want to learn from the best?

Then click here and check out a 90-minute seminar Murphy did entitled Applying Technical Methods in Today’s Trading. No matter where you are in your learning curve, I’m sure there’s something useful you’ll be able to take away.

Struggling with support & resistance and knowing what the key market levels are? Check out the Price Distribution Analysis methods I use.

What type of trading resources would help me read charts?

I think technical analysis is crap, and I should study economics to swing trade forex

Am I Ready to Trade Live?

Should I Become a Chartered Market Technician?

The Dominant Players in Forex

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For a while there I was starting to think this would never happen. The count was stuck in the 900s for a long time.

As much as I love to see the page view and visitor counts for this blog rise, to my mind its the RSS feed subscriber count which is the more important. After all, it represents folks who think enough of what I’m posting day-in and day-out to want to have the posts automatically coming to them.

Struggling with support & resistance and knowing what the key market levels are? Check out the Price Distribution Analysis methods I use.

October’s Outstanding Offerings

Do you really need live data and charting?

Scalping Individual Stocks

January’s Gems

Trader interaction and information sharing

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