The Finance Book Club

The only useful support/resistance is the one labeled “trend-reversal level” to be used as initial-&-trailing stop …

Candlestick charts

1. Any single candlestick does not have much meaning (so there, Al Brooks)
2. Specific candlestick formations have colourful names
3. The ones BD finds most useful
   1. Doji - open and close are nearly the same so the body is tiny with a long wick

1. Dojis show market indecision
2. Especially important after a trend
3. BD refers to a doji that formed on March 2009 after a relentless bear market, ‘the only doji on the chart’ ; it was a sign of selling exhaustion
4. Stocks quadrupled from that point
5. Hammer candles
   1. Hammers indicate aggressive price action and reversal at an extreme and ‘often’ predict a reversal
   2. For BD anything that looks like a hammer is a hammer - long wick with a narrow body at the high or low

1. The size of the head is less important than the length of the wick as they show larger reversals
2. BD especially likes these on the daily chart as they can set up trades with clear risk/reward

Ichimoku

1. A japanese method of plotting price and time
2. They are most commonly used with USDJPY and JPY crosses (really?)
3. They use a cloud formation to define the current and future trend
4. Ichimoku means ‘one look’ in Japanese and it attempts to tell you everything you need to know in one glance
5. BD has a comically simplified view of how Ichimoku works
   1. My usage of ichimoku is simple. If I’m bullish and USDJPY is above the cloud, I buy near the top of the cloud and stop loss if USDJPY falls out the bottom of the cloud. You can do the opposite when you are bearish.
   2. This sounds to me very much like he doesn’t use it at all

Market Profile

1. BD claims this is his second favorite way of visualizing market data after candlesticks
2. He also claims to make market profile charts manually during the day when he has time to ‘stay in the zone’.
3. Each letter in the chart represents a block of time

60 minute blocks shown in this diagram

 

1. Each column of letters represents a day
2. The date is indicated on the x-axis
3. The more letters there are the more price traded at that level during the day
4. To do this manually ‘simply’ create a blank grid on graph paper with 10 pip intervals on the y-axis
5. Put an A beside every price that trades in the first hour of trading
6. B next to every price in the second hour of trading, and so on
7. Try this and see how it feels! (sigh, I might) you can use 10 or 30 minute intervals
8. BD urges us not to just skip this but actually do it! (ok, ok! I will, dammit now let’s move on)
9. Market profile gives you the ability to quickly identify equilibrium zones - areas where many letters form large clusters - where a lot of trading took place (but then so does renko and it’s much less work)
10. Single print - a strategy for market profile
    1. Find a point where there is but a single letter (price arrived and moved away)
    2. This is a place where price aggressively rejected the level
    3. Consider this a key pivot
    4. BD would never trade a single print by itself - he simply notes it as a way to determine a SL or to ‘maximize leverage’

BD says we need to find our own style and methods

Point and figure charting

1. Waning in popularity says BD

Fibonacci Numbers

1. A mathematical sequence
2. The popular ratios in finance are 23.6%, 38.2%, 50%, 61.8%, 76.4% and 100%.
3. Used to estimate possible retracements
4. Traders talk about them more than they use them
5. BD urges us to use caution as there are simply too many levels
6. As a result BD rarely finds them useful (but you could say the same thing for all the TA he’s shown us in this chapter)
7. “it is painful to get stopped out of a trade and then watch it go your way afterwards, but it is much more important to stick to the plan and maintain discipline than it is to catch any particular move”
8. “Your ability to interpret price action is dramatically impaired once you are in a position. Your ability to remain impartial is so compromised that once you have a trade on you are almost always better to stick to your original parameters and ignore the price action. Otherwise, you are bound to do something reactionary or stupid.”
9. “If the trade is making you nervous, stop white-knuckling it and go refill your water bottle or do some pushups.”

Please explain. Where do you see this label?

I have explained this issue in several posts, but here’s a screenshot from my thread ...

As luck would have it the exact setup you describe is playing out right now in real-time. We'll let the market decide the value of your reasoning. So this is a perfect time to go short, yes? I will take the opposite view, not for any 'price action' reason but just for fun.

Identify the regime

1. Is your trade in a trend or a range
2. Range-bound markets are harder to trade than trending markets says BD
   1. More false breaks
   2. Positioning is more important

3. Trending markets are easier as long as you didn’t join the trend too late and still believe in the reason for the trend (what if I never believed it but it still goes on and on?)
   1. Trade pullbacks
      1. Identify the trend
      2. Pick an MA
      3. Enter as price pulls back to the MA

   2. Trade breakouts and continuation patterns
      1. Look for textbook patterns like flags, pennants, triangles and play those breaks
      2. Trade with a stop approximately = to average daily range x 1.5
      3. The advantage of trading breakouts is that you are with the directional momentum of the market
      4. The disadvantage is you are buying high and selling low in comparison to the trend pullbacks strategy
      5. Still, many traders like to buy higher and sell lower
      6. BD shows us an example of a bull flag

 

1. Flag patterns form after a rapid move then a consolidation
2. BD says technical analysis is fractal meaning any patterns can be found on any time frames
3. The idea behind the bull flag pattern is simple - buy the break of the top of the flag
4. The target is the length of the flagpole added to the bottom and top of the flag
5. Buy on a daily close above the flag
6. Stop set below the bottom of the flag
7. Pennants are like flags but triangular
8. Triangles have no flagpole
9. “You only do these trend-following trades if you believe in the trend for reasons other than what you see on the chart”

Reversal Patterns

1. Bd’s favorites are double and triple tops
2. BD says they’re self-explanatory and true to his word he doesn’t say much more about them

In your example, the downtrend was started when “4” was broken, making WaveA (5-to-A) the first bearish impulse wave …

Btw, I only do the weekly chart to identify the ongoing trend for simple reasons that the market moves 24/5 and “spikes or false breakouts” usually happens in the daily or lower timeframes …

Chapter 7 - Understand Technical Analysis II (the Seven Deadly Setups)

1. “It is important to research, study, and understand as many trading approaches as possible and then adopt and incorporate the ones that work for you.” (try everything and discard what doesn’t work)
2. BD cautions that these don’t necessarily work better than other patterns it’s just that
   1. He recognizes them easily
   2. He believes in the underlying logic of why they work
   3. They suit his style
   4. He prefers mean reversion over breakout and trend strategies

1. Slingshot Reversal
   1. A false break and retrace
   2. An important support/resistance level breaks but then fails to hold
   3. The market takes out an important level, fails to follow through, runs out of momentum, reverses back into the old range
   4. It must happen around a level of ‘high importance’ - many people watching it
   5. Works because when an important level is broken it forces capitulation by those on the wrong side and encourages those on the right side to add-on
   6. If price reverses the market will be caught offside

USDJPY example

1. April - November 2017 UJ ranged from 108.00/114.50, despite ‘raging optimism’ in us equities
2. “On November 7, the pair rallied up and spiked aggressively through 114.50, touching a high of 114.73 before quickly reversing back below 114.50. Figure 7.1 presents the chart.”

1. Identify a crucial watched level. BD emphasizes how important this is but I have to assume any obvious resistance/support level on weekly or monthly charts would be expectantly ‘watched’.
2. Wait for the resistance level to break, and when it does put a stop 0.10% below the key level. In this example you wait for 114.5 to break and put a sell stop at 114.39
3. Put a stop loss above the new high 0.10% (10 basis points) in this case 114.73 and add 10 pips so 114.83.
4. Find a reasonable TP. In this case 1.5 or 2x average daily range. BD says there is a double bottom at 111.5/70 so he puts his target at 111.76 (just above the double bottom). This was hit in ‘a few weeks’.
5. Since this level allows for a tight stop, it allows for significant leverage so trade them aggressively says BD

Can I test this? Should I test this? It seems like we’ve seen this all before. Ah, what the heck.

I’ll use UJ same as BD. I’ll use YTD. I mark my start point as usual and use levels that he used back in 2017 as well as anything really apparent on this timeframe. I have to admit UJ does seem to operate in a reliable range in recent years.


I’ve marked all the points of interest.

1. A) Price doesn’t break through this level and since BD doesn’t give us a buffer or cushion we have to consider that rule 2 was not invoked and so this great long trade wasn’t taken. This is the problem with following strict rules as some authors (like BD himself) have pointed out to us. It is possible to be too mechanical.
2. B) Here the level is broken but price doesn’t return to trigger the trade so a loss is avoided. The requirement to require price to move to our entry level 0.10% below the level break seems like a very good rule indeed.
3. C) Here the level is broken from above; it returns to trigger a trade and looks like our stop would not have been hit. The ADR at the time of the trade was 454 points so let’s say we take a profit at 900 points (2x) which would have happened 3 days later or so.
4. D) Again a level is broken but doesn’t retrace enough to trigger our sell stop and a losing short trade so it’s almost like these levels have less impact than the requirement that price prove its intentions to us.
5. E) Much like C a valid trade is triggered long and doesn’t hit our stop and we take profit a week or so later.
6. F) Same thing. Maybe these levels aren’t such a waste of time after all! 3 successful trades, no losses. Obviously that’s not enough to prove anything though let’s try another one.

EURUSD this time.
A) is a level I draw after price formed this peak so there is no trade there.
B) A loss
C) Common sense would dictate not trading the same trade again but since BD gives us no re-entry rules let’s behave like an idiot robot and take every trade. This one would also lose
D) After price hangs around this level for a while I’m not even sure if this is a long or a short trade. Either way it loses
E) A loss
F) A loss
G) No trade as the level wasn’t broken.
H) A win
I) A win depending on how you consider the direction after the first non-trade
J) No trade entered.
K) A win
So, not as good as the first test but I can’t dismiss this notion of BD’s entirely so good on him. The question is - would this be more successful if we simply put an arbitrary level at regular intervals? Recall the success of our Anti-Gunner test. This is nearly the same idea. Does the ‘watched level’ actually have any power? It’s still very doubtful to me. What is happening is that once price moves 0.10% it tends to continue to move that way.
Last note - the 0.10% stop is far too tight for my taste, but to each their own I guess?

1. Shooting stars and hammers
   1. BD takes a moment to bash Fibonacci once more as useless for picking entries
   2. He prefers hammers and shooting stars; they are like ‘ringing bells’ to tell you when to get in
   3. He cites an example of a trade that began with a slingshot reversal and a ‘huge’ bull hammer bottom

Having tested this type of notion dozens of time I can tell you it’s not worth checking. There are significant hammers and stars at many points in the middle of a long trend. It’s true they also form at reversals, in fact, they nearly have to, but the only benefit to watching these is if you already have a notion things are bound to reverse, as BD has said a couple of times.

1. The Deviation
   1. Indicators need to match your trading time frame/horizon
   2. BD prefers using a simple overbought/oversold measure which calculates how far away price is from a 100 hour moving average. He calls this ‘deviation from the 100 hour’ or ‘the deviation’ and uses it as an early warning system
   3. He warns that this is by definition trading against a strong trend so you have to be careful. No matter how crazy, things can always get crazier.
   4. In fact when things rip far past their normal range the first thing you should ask yourself is ‘why’? There may be a valid reason that should not be ignored.
   5. If there is no strong fundamental reason then you want to fade these moves.
   6. USDCAD is ‘known for mean reversion’
   7. Anything more than 1% away from the 100 hour means the USDCAD is overdone
   8. Never use on its own to initiate a trade, but only if you are already looking short.
   9. BD will leave ‘standing orders’ 1% above or below the MA
   10. He allows a further 0.7% for his stop loss for price to continue to overshoot past the initial 1%
   11. This is also a good place to take profit - 1% past the open, ‘sell some out’ and buy back later at a better price

I’m fairly optimistic about this one. Shall we have a go? Let’s use BD’s recommended USDCAD and look at 2021.

I’ll start at the start of 2021 after price touches the 100H MA. Then I set a 1.00% measuring stick to check when it moves 1% from the MA and a 0.70% stick to check the SL level. We need to adjust the measuring stick with the slope of the MA something which would only need to be done every day or so in real-time.

Attached Image (click to enlarge)

A very good initial first trade. The far side of the coral line is the stop, and wasn't even threatened.

Attached Image (click to enlarge)

Up to now there would have been about 29 trades taken, 17 winners. So better than 50% thus far. I can also tell you, that the odds of success improve considerably if you wait for price to reach the 1% level, exceed it and then come back to that level. Most of the losing trades occurred in the latter half of this year when USDCAD got ‘trendy’.

1. Volume spike at a price extreme
   1. Most traders don’t use volume when analyzing FX
   2. Most FX trading takes place in the interbank or OTC market where volume data is sparse or unreliable
   3. FX volume can be found using futures sources; they are an acceptable proxy
   4. Actual volume is less important than relative volume
   5. BD asks if volumes are high today/last hour/10minutes, and is there a big price move on extreme volume
   6. A large volume spike at a price extreme is a sign of capitulation
      1. BD stays on the sidelines until the dust settles in such cases
      2. He waits for 2-3 bars of falling volume
      3. After 90 minutes or so enter with a stop below the swing
      4. BD restates that he won’t enter just because of the volume spike - the fundamental picture has to support it

How can I test this without a futures volume source? BD doesn’t mention if this is from COT or Bloomberg or???

1. Broken triangles
   1. Triangles get attention because they are easy to spot
   2. Sign of consolidation
   3. A breakout of a triangle is supposed to mean something but (??)
   4. BD likes to trade what he calls the ‘second derivative’ of a triangle
   5. When a triangle breakout fails and comes back through the triangle, all the people who were suckered by the breakout are caught
   6. Similar to a slingshot reversal

1. Price dropped breaking downward but then shot up, a classic bear trap fakeout.
2. BD enters as soon as price returns inside the triangle, after a bar has closed above the bottom of the triangle (if he was long)
3. Stop placed below the bottom of the triangle.
4. Rare but powerful says BD

Checking AUDUSD on D1 I found only 4 examples of this ever happening since 1995 so it is rare indeed. However true to his word 3 were winners and only 1 loser, but it was this year. There is also more than a little subjectivity involved in identifying this pattern.

1. Double and triple top
   1. Simple but effective
   2. BD cites the example of USDCAD in December 2015
      1. Pair has ‘rallied relentlessly’
      2. Oil is going higher for fundamental reasons
      3. BoC is worried about currency weakness
      4. USDCAD has rarely stayed above 1.4 for long
      5. Has rallied to the 100H deviation
      6. Bumping up against major round number resistance
      7. Has failed 3-4 times already
      8. So BD is bearish. Sell near the top of the triple top with a stop above it.
         1. Small stop means big leverage
         2. BD enters short at 1.3980 and a stop at 1.4017

Risks 37 pips to make 100-150
I’m going to guess that it’s uncommon to have this many factors favouring one trade? So a five-star setup? BD doesn’t say.

1. Sunday gaps
   1. The most reliable but the most difficult to trade says BD
   2. Major news over the weekend
   3. Market reopens at a new level on Sunday
   4. They ‘almost always’ reverse within 48 hours
   5. BD’s study of 20 gaps found 85% of them reversed to the Friday close within 2 days
   6. The gap occurs because of an order imbalance and that imbalance corrects as liquidity returns
   7. BD cites examples but I don’t think they teach us much that hasn’t been said already except that gaps close even when news is ‘unambiguously bad’.
   8. They are emotionally hard to trade because you have to take the other side of very important news
   9. Method
      1. Take the other side of the gap in the opening hour of trading with a comfortable position size
      2. Place stop one average daily range away
      3. Cover when the gap is 90% filled (and these days, probably 80%)
      4. One of the most profitable setups in trading.

I trust BD so far but I always check everything. Let’s go.

Confirmed


Confirmed


Confirmed.

I think this works. The drawback? Gaps of any size are exceedingly rare. Like, mabe once a decade rare. This is not something you can rely on to make money unless it works in commodities, indices, stocks too?

Combo Setups

1. The usual ‘confluence of factors’ argument.
2. The more good reasons you have to put on a trade the better it will work out. (my anecdotal experience hasn’t confirmed this, but doing systematic checks of multifactor analysis is difficult so I haven’t done it)
3. For any trade
   1. A standard support level means zero
      1. But if it’s also the yearly low
      2. Touches a major trendline
      3. Major round number

   2. Now it’s interesting
   3. If there is a slingshot reversal through the level
   4. On record volume then it’s a technical five star trade
   5. If BD can then find 3 different macro reasons it’s time to get ‘aggressively’ involved in a trade
   6. Make the biggest possible bet within your risk management plan

4. The opposite of this is when you find a good signal but there’s ‘a bunch’ of contraindicating factors too. Don’t ignore them

You can see why this style of trading isn't very popular. It demands a lot of effort to check all these factors. Then again, I haven't found any successful methods that don't demand a lot of effort. And on the third hand, it should be possible to automate some of these checks using the newfangled power of compu-tors.

Next: Understand Funadamental Analysis

Chapter 5 - Understand Fundamental Analysis
Based on what we know about how BD trades I expect this to be the best chapter in a pretty good book so far. I only wonder why TA got two chapters and Fundamental analysis only gets one?
‘‘In the short run the market is a voting machine. In the long run it is a weighing machine.’’ - Graham Dodd

1. Short term price action is driven by emotions of traders
2. In the long run everything reverts to an equilibrium governed by fundamentals
3. Even scalpers should understand the whole picture
4. Specialization is good but complete understanding is great
5. Fundamental (macroeconomic) analysis is distinguished against other forms of analysis like momentum, positioning, and sentiment
6. Long-term FX valuation is mainly for academic textbooks but it can provide a better understanding of what determines valuations (and it pads out a book like nothing else - this section I may skip or gloss over as we went through it in BWILC)
7. Purchasing Power Parity, etc.
8. Orthodox economic assumptions are too simplified, contain many faulty assumptions
9. IMF valuations are long-term assessments, useless for trading as currencies can stay over or undervalued for decades
   1. Knowing why a currency is over or undervalued though is useful so that you can know under what conditions it might return to fair value
   2. You should stay equally comfortable being long/short a currency despite its PPP outlook
   3. Market drivers change as you move from long-term to short-term horizons
   4. Positioning and momentum are more important short-term

FX Fundamentals can be domestic or global

1. Global
   1. Growth
      1. Influences the flow of money around the world
      2. Exporters like CHN, KOR, BRA do well when it’s strong
      3. Safe havens like JPY, CHF and USD receive flows when it’s weak

   2. Commodity prices
      1. Usually driven by global growth
      2. But also climate, production, supply, demand, and overall popularity
      3. BRA, CAD, AUS benefit from commodity price strength
      4. TRY, IND are hurt by high commodity prices
      5. Some countries are know for specific exports and they have a large effect on FX prices

   3. Risk aversion
      1. Risk on traders seek yield
      2. Risk off they seek safe havens like JPY and CHF

   4. Geopolitics
      1. Russian instability for example will trigger selling in RUB, PLN, TRY

1. Domestic
   1. The market oscillates between global/domestic focus
   2. During high risk aversion or focus on China, domestic drivers become irrelevant (interesting)
   3. In stable times, local changes, domestic interest rates and policies, can be the dominant driver

1. Domestic Drivers
   1. Monetary Policy - the number one domestic driver most of the time
      1. Interest rates
         1. One of the two main policy levers
         2. The most important variable driving FX most of the time
         3. A product of central bank policy
         4. Look at rates all along the curve from overnight rates out to 30 years
         5. Look at absolute rates and direction of rates (rising or falling)
         6. Look at shape of yield curve (relationship between short and long term rates)
         7. Look at real rates (interest after inflation)
         8. Compare one country’s rate to another - for ex. USDCAD look at the yield difference between US 5 year notes and Canadian 5-year notes (or swap rates). If Canada’s rates are falling, and US is rising, expect USDCAD to go up
         9. Econ 101: higher rates attract capital; lower rates trigger outflows
         10. Works as a rule in developed countries, less often in exotics (ah, so my ruble, real comments earlier may have been superfluous)
         11. Yield curve
             1. Upward sloping line is normal - short term rates are low, and rates go higher out in time - bullish
             2. Inverted - suggests rates are being held too high and future outlook is uncertain - signs of recession
             3. Recall that they’re comparative; if US rates are rising but CAD rates are rising faster, USDCAD will fall

 

1. Balance sheet size
   1. The other policy lever

2. Growth
   1. Usually good for a country and a currency
   2. Metrics include GDP, Industrial Prod., Retail sales, Housing

3. Inflation
   1. More ambiguous
   2. Rising inflation is good for a currency when their central bank is credible and willing to raise rates in response to inflation - this applies to G10 countries “most of the time” (not now, nor likely ever in the future it seems)
   3. Otherwise it’s bad as the perception is central bank is behind the curve as the currency will lose purchasing power and value
   4. BD avoids trading emerging markets after inflation releases as the moves seem random and confusing

4. Central bank preference for weak or strong currency
   1. Reading all speeches and official releases of central bankers is the first step to becoming a pro trader
   2. Many central banks have long-standing historical biases like the Bundesbank’s preference for tight policy, a holdover from the Weimar hyperinflation event
   3. The Fed on the other hand has a tendency to keep rates too low, too long, a reflection of Keynesian values
   4. Hawkish policy is a desire for higher rates
   5. Dovish policy is a desire for lower rates
   6. “You will often see a currency react strongly to a central bank’s change in bias and then by the time the central bank actually moves rates, the currency barely reacts because the change in rates was fully priced in (expected) by that point.”
   7. BD cites the example of RBNZ which warned that a hike was coming for about a year.

5. Direct intervention
   1. On rare occasions a bank will actively buy or sell their own currency
      1. 2011 CHF put a floor under EURCHF promising to sell unlimited quantities of swiss francs to ensure the pair would not fall below 1.2

6. Signaling
   1. Since it’s expensive and risky to intervene, central banks prefer to signal a desire for stronger or weaker currency which is usually sufficient to make it happen
   2. Aka moral suasion
   3. Works if the central bank is credible

“1. ‘‘Although removal of monetary stimulus will likely be needed in the future, we expect to keep the OCR unchanged through the end of the year,’’ July 25, 2013.
2. ‘‘OCR increases will likely be required next year,’’ September 2013.
3. ‘‘Although we expect to keep the OCR unchanged in 2013, OCR increases will likely be required next year,’’ October 2013.
4. ‘‘The Bank will increase the OCR as needed in order to keep future average inflation near the 2 percent target midpoint,’’ December 2013.
5. Hiked on March 13, 2014.

Note that on the date of the actual hike price actually moves contrary to expectations as part of ‘buy the rumour, sell the fact’.

1. Traders must ‘do the work’ to know central banks as they likely cannot talk to the bankers directly
2. Some central banks are more independent than others, some like BoJ are mouthpieces for the government
   1. Capital Flows
      1. Foreign direct investment
      2. Mergers and acquisitions
      3. Equity and bond flows
      4. Cross-border transactions can generate massive FX flows as a foreign company must pay for an acquisition in the domestic company’s currency
      5. M&A flows are short-term
      6. Portfolio flows can last months or years
      7. After Draghi’s ‘whatever it takes’ speech the Euro rose for 2 years as investors accumulated Eurozone assets despite a weakening EUR economy and low rates
      8. Flows are fickle and hard to predict; usually used as explanations more than as forecasts
      9. ‘FDI’ is usually not important but capital flows are more important in EMFX (emerging market fx?)
      10. Watch sovereign credit ratings, foreign equity markets

   2. Trade Balance and current account balance
      1. Little influence in the short run

BD emphasizes that the market trades off the delta (change) in fundamental values, not the absolute values.

1. Efficient markets have fundamentals priced-in
2. Prices change when new information comes to light - data release, central bank announcements
3. New info is evaluated against expectations

Understand intervention and reserve recycling

1. Some central banks (China and other Asian central banks) intervene in currency markets in order to manage or peg their currency to another
2. The Asian Financial Crisis of the 1990s taught the central banks that foreign reserves can be useful protection in a crisis
3. China had almost $4T in FX reserves in 2014; mostly USD but with a balance of others
   
   Attached Image (click to enlarge)

   
   
4. To maintain this balance occasionally they will need to unload inventory (is this what ‘recycling flows’ means?)
5. So when there is pressure on EM currencies G10 currencies will get ‘hit in sympathy’
6. “Quite often, this effect is most visible in the commodity currencies because when EM is weak, commodity currencies suffer under the double whammy of global growth fears (which are usually a big driver of EM weakness) and recycling flows from reserve managers.”
7. Fiscal policy
   1. Has become less important over time

Understand US Economic Data Releases
The market focuses on three aspects of economic data:

1. Timeliness
2. Relevance
3. Reliability
   
4. US data has pre-eminence
5. The importance of a data release changes depending on the prevailing story. BD cites the example of a housing-led recovery where housing data gains prominence
6. The market only cares about how the number compares to expectations
7. You need to get a feel for average values so you can gauge how big an overshoot or undershoot has been
8. Economists tend to shy away from extreme forecasts so the numbers they come up with are more tightly clustered around the mean average than they should be; there is therefore room for large surprises on a regular basis
   1. Economists do this to avoid looking stupid; safety in numbers, etc.

   
   

9. Shorter time-frame data is always more important than longer time frame of the same type; so month on month releases trump yearly releases

Nonfarm payrolls (NFP)

1. The big show
2. Considered timely, accurate, and high impact
3. Three numbers to watch
   1. - headline figure shows net number of jobs created;
   2. Second is the unemployment rate
   3. Third is average hourly earnings

Initial Claims

1. measure of the number of jobless claims filed by individuals seeking to receive state jobless benefits
2. Lower numbers are better for the economy/currency

GRAY = ORANGE. Whenever a gray line is referenced in this book it means ‘coloured’. I can see multiple places on this chart where the orange line does something but the white line doesn’t respond.

“So why do people still care about the unemployment rate when claims already
tell you where it’s going? I have no idea! The market trades off all sorts of backward-looking and lagging indicators. My view is that often it is best to know what markets care about and not worry too much about why.” Randomness is why.

Continuing Claims

1. Released with Initial Claims
2. Less volatile and less focus is put on it

Gross Domestic Product

1. Released in 3 versions
   1. Advance = least accurate but most timely
   2. Preliminary = more accurate
   3. Final = most accurate

2. Estimated figure
3. The advance report is the most important as it creates the most volatility/most surprises
4. BD barely pays attention to the final report but advance is of ‘top importance’

Core Personal Consumption Expenditures

1. Excludes food and energy prices (the most important ones it seems to me)
2. Fed inflation target is 2% so when inflation rises above this it takes on added importance
3. Low inflation is also a fear as it can lead to deflation; this is justification for QE

Consumer Confidence

1. An economic health barometer from the consumer perspective
2. Six months out horizon
3. Higher consumer confidence should lead to increased spending in theory
4. Consumer spending is about 70% of GDP
5. The market tends to buy stocks and UJ when the confidence is strong and their charts are correlated

ISM Manufacturing and Non-Manufacturing

1. Info submitted by purchasing and supply executives
2. Non-manufacturing deals with the service side of the economy “subcomponents: New Orders, Production, Employment, Supplier Deliveries, Inventories, Customers’ Inventories, Prices, Order Backlog, Exports, and Imports. “
3. The most-watched subcomponents are New Orders, Prices, and Employment.
4. Employment is an important input in most NFP forecasts

Consumer Price Index

1. Measures change in prices for an average urban consumer
2. There was an expectation that QE in 2008 would raise inflation but it didn’t happen (instead it inflated property and stock bubbles)
3. BD points out that it was very carefully scrutinized when it rose above 2% but was mostly ignored otherwise

Durable Goods Orders

1. Compiled from results of the US Census Bureau’s Manufacturer’s Shipments, Inventories and Orders (M3) survey
2. Provides stats on shipments, new orders, backlogs, etc.
3. BD says the number for this one is very very volatile
4. Despite that, the market trades it, he claims

But this is the very picture of random noise so I’m going to call BS on this and much of this chapter, frankly.

1. Building permits
2. Housing Starts
3. Pending Home Sales
4. New Home Sales
5. NAHB Housing index
   All have importance ranging from 2-4 stars depending on what’s going on in the market

Industrial production

1. The Fed’s monthly index of industrial production and related capacity indices covering mining, electric, gas utilities
2. BD is surprised the market doesn’t pay more attention to it as it is ‘clean, timely and relevant’
3. However it doesn’t cover services which is a dominant part of the US economy

Retail Sales

1. A measure of the robustness of consumer spending, confidence and the overall health of the US economy
2. Conducted by the US Census Bureau again
3. The most important figure is the month-on-month figure, ex-autos and gas

Chicago PMI
Philly Fed
Empire State - all 3 stars and released monthly

1. Regional business surveys similar to ISM
2. Leaked to subscribers at 9:42am and then 3 minutes later released to the public

BD mentions that different data sets rise and fall in prominence. Recently TIC data have enjoyed ‘15 minutes of fame’. M2 used to be important but is no longer.

1. There is no excuse for saying ‘whoa, what just happened’ when a number comes out
2. “That’s a clown move”
3. Be ready for every release or find another passion

BD goes on to mention global economic releases - you just find a list online or look at a forex calendar. The importance of each release varies depending on context that is market and time-specific.

The thing I know for certain is that humans, even the smartest and most skilled suck at multivariate analysis. We can read 100 reports, memorize them, and ponder their interrelations but when it comes time to make a decision we invariably go with our ‘gut’ or diffuse mode brain. The extra data doesn’t help. A computer might do much better.

However, since a data release, if it’s important, will move the price, watching for a price move seems to be nearly as good as crunching the data and having a pre-established bias before a report comes out. It’s certainly less work. It’s also much less frustrating when you’re wrong as there was no sunk cost. Maybe I am just not ‘passionate enough’ about FX, but it seems like all this effort is mainly corporate theatre’. Effort expended to look like a good employee as opposed to being a profitable trader. I should dig a little deeper and find out for sure though.