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OK. First one of these, please be kind. I need to start somewhere.

"

*EUR/USD Fundamentals for the forthcoming week:* 


This could be another crazy week. It's the first trade week of the month, we have a Euro Rate Decision in conjunction with Trichets' press conference shortly after on Thursday and Non-Farm Payrolls out on Friday morning. We need to keep these events in mind as they draw closer as we will most likely see increased volatility and they can set the tone for the few weeks that follow. Although those are the big market moving events, we do still get possible market movers earlier in the week. 


Monday 0200 Est. German Retail Sales 

Monday 1000 Est. ISM Manufacturing PMI 
Tuesday 1000 Est. U.S. Pending Home sales 
Wednesday 0500 Est. Eur. Retail sales 
Wednesday 0815 Est. ADP Non-Farm 
Wednesday 1000 Est. ISM Non. Manufacturing PMI 
Wednesday 1030 Est. Crude oil Inv. 
Thursday 0600 Est. German Factory Orders 
Thursday 0745 Est. Euro Min. Bid Rate 
Thursday 0830 Est. ECB Press Conference 
Friday 0600 Est. German Industrial Production 
Friday 0830 Est. Non-Farm Employment Change 

This week, as usual, I will be monitoring how the equity, commodity and bond markets are reacting to the list of fundamental events above, since we all know these correlated markets tend to influence the forex market greatly. 

As far as trading during these events is concerned, I will most likely try to be flat heading into the release of any of major news events because I really need to observe how the correlated markets react to the data, especially because other markets are in peculiar spots. 

See, I find coincidence in any market hard to believe. What I mean is this, how is it that on the most anticipated week of the typical month we are lingering at such key levels? The S&P is nearing the psychological 1000 level, Gold is trying to sustain its break over $950, moving its way to $980 then $1000, and Crude, as I write this, is trying to sustain back over $70. 

As the week progresses, the data released will cause these markets to either break through these levels or come back down, most likely bringing the Euro with it. These are the tones I will be looking at and thinking about as I prepare to enter the market. 

X. "

Contrary to rumor, I'm still alive, I've not been abducted by aliens, taken hostage by pirates, quit trading the markets, and I've not abandoned our wonderful community.

For almost three years now I've put in no less than 50-hours a week learning the markets, trading, and helping other traders become successful. Over the past year and half there's been many 70 and 80-hour weeks with not even as much as three days break in between. In my pursuit to soak up as much knowledge as I can about trading and to sustain myself as a professional trader and to freely give as much as I can to my fellow trader, just like everybody else who does this full-time, I've made a lot of personal sacrifices.

I never regret any decision I've ever made in my life, good or bad, and believe me, I've made a lot of bad decisions the past few years, but they cannot be undone, rather, I look at them all as learning lessons and something to draw from in order to make better decisions in the future.

I'm the type of person that puts my heart and soul into everything I'm passionate about and trading is obviously a passion, but in my quest I've damaged personal relationships all for lack of time, attention, and learning how to balance my work with my life. I've missed far too many weddings, births, funerals, vacations, family gatherings, and opportunities to spend time with people I care about and love.

Some men define themselves by their work. Right or wrong, that's not for me to judge, but I do not want to be defined by my work but rather how I treat other people and how I place value on the most important things in life.

Several traders in our community have had my time and attention for over two years, through all the market ups and downs, and through the worst financial turmoil since the 1920s, and we've managed to survive and come out on top despite many seeing complete financial ruin the past 10-months. As I said, I'm not going away and I won't reward your loyalty by jumping ship or quitting on the vision and mission of our trading community. I'm just taking a break right now, that's all.

One of the reasons I quit doing the paid-subscription stuff is because I saw the burnout coming, and no amount of money in the world is worth burning out over, but I also know traders need a strong community that stands for truth, sound trading principles, and a forum for the free exchange of ideas and opinions without the burden of subscription fees or a "dictator" that would suppress a higher consciousness for how to successfully attack the markets.

Between this community and the prior two trading communities I've led, I have been fortunate to see a small "army" of traders emerge... I'm talking about very fine traders, consistently profitable traders, smart traders, traders that have taught me new things, and traders that I have the utmost respect for. I won't embarrass anybody by calling them by name, but you know who they are... part of my vision is to see those traders who've paid their dues and come up through the ranks to take a leading role in the community so that this place doesn't have to revolve around me. There are some superstar traders in our ranks... it would be good for their voice to be heard too...

Well, I'm getting ready jump on a plane and head back out of town for a few days, but I will be back in Nashville on Sunday evening. I will write a weekly outlook for next week and be back in the chat no later than Monday morning (20-April). Thank you and I wish you all well.

-David   

Today's update will serve as a "mini" weekly outlook and cover some issues we'll need to be mindful of for the remainder of the trade week. Once again we have a holiday shortened week and most of the major world markets and banks are closed. When Asia opens later this evening the markets and the liquidity will begin to normalize, and then we'll be back in full swing as Europe re-opens for trading at 0700 GMT on Tuesday.

Inflation fundamentals:

Starting on Tuesday and straight through to Friday the market's will have to contend with some of the biggest and most analyzed fundamental data we get on a monthly basis. In my opinion, retail, inflation, and consumer data will capture the spotlight because those three key areas, along with housing data, are the foundation for the US economy and US equity markets and will be the catalysts for how market participants perceive "recovery".

I put the word recovery in quotes because that's the mindset right now... that the markets are recovering, that the fundamentals are "bottoming", and the worst of the worst is over. There are many reasons I cannot agree with this line of thinking, but one of the main reasons has to do with time in addition to what the inflation and consumer data should show this week.

A true and sustainable recovery will depend on one very key thing -- inflation. To the average person or investor inflation sounds like a terrible thing, and while this is true to a large degree, inflation is really the only path that leads to recovery and it's the only tool the Fed truly has to stop the season if disinflation all markets are experiencing.

Between Tuesday and Thursday the markets will get PPI and CPI data for both the US and Eurozone. The PPI data will show us what type of inflation and price pressures are floating around the manufacturing, industrial, and production sectors while CPI will reveal what's happening on the consumer-side.

With the Fed running the printing presses like a 24/7 Kinko's store, talk of inflation fears have surfaced lately but I'm not one of them sounding the inflation alarm quite yet. I'm still more fearful of deflation and disinflation at this point. The surge in M3 and the USD monetary base has been mostly directed to many of the banks and large financial institutions, both in America and Europe, with the purpose of simply keeping them solvent. That type of rapid expansion of the Fed's balance sheet and the Treasury's money-supply has not been directed squarely on the consumer, therefore, the true definition of inflation cannot actually be applied to our current situation.

During the first leg of this recession the Bush administration directed inflationary stimulus right at the consumer, and that helped lead to the peak of crude oil at $147, the EUR/USD at 1.6000, gold over $1,000, the Dow at 14,000, 10-year Treasury yields over 5.00%, etc. Those events happened as the Bush administration cut checks to almost every US taxpayer... consumers got hundreds or even thousands in "free" money from the government with the idea they would put that stimulus directly back into the economy and the equities markets. And that's exactly what they did -- during Q1 and Q2 of 2008 we saw GDP surge in addition to all of those markets hit their tops.

The prices of those markets are dependent upon inflation, but once the stimulus ran out, it was time for reality to run in... and reality ran in like a freight train in July of 2008. When the stimulus stopped stimulating, all markets died and you can clearly see how closely the timing of the two were. It's one of the most beautiful cause-and-effect moments these markets have ever seen, because you can time the end of the consumer and the end of inflation to the peak of all inflation-dependent markets like equities, commodities, and non-risk aversion currencies like the euro, pound sterling, kiwi, and Aussie.

So it's my opinion that the true bottom for the Dow, S&P 500, USD, JPY, gold, crude, you name it, cannot be put in until we see CPI, PPI, and the Import Price Index stop declining and begin moving back up. The biggest risks to those markets would be a continuing trend of declining producer and consumer inflation with the worst case scenario being negative prints on CPI and PPI.

Now, suppose Core CPI printed at -0.1% on Wednesday for example, that doesn't mean the markets are going to freak out and sell-off right on the spot, but it's more of an underlying fundamental that would show true recovery is not yet ready to take hold. I do not have a forecast for CPI and PPI this week, but I wanted to use this commentary to explain how the inflation factor is important to prices either continuing to move up, staying in a range, or potentially moving back down over the summer session between June, July, and August.

I think it's extremely important for traders like you and I, especially because we trade FX, that we have a solid understanding for exactly how the underlying fundamental of inflation is such a key catalyst for what the markets perceive as "growth".

The spike in M3 money-supply and the overall monetary base has yet to begin to trend with Core CPI, CPI, and PPI but at some point in the future, when those underlying fundamentals do begin to work in tandem and move up accordingly, I believe we'll be able to call a "bottom" with much more certainty and truth as opposed to using something like a 20% gain on the S&P 500 as a gauge for the end of the bear market and the resurgence of a new bull market.  

Wall St.:

Bank earnings will share the spotlight this week along with the key inflation and consumer fundamentals. Do we still have a banking and credit crisis? We may get our answer this week as many of the largest banks and financial institutions report 2009 Q1 earnings. Last week Wells Fargo gave a positive report and as we all know the Dow and S&P 500 surged but I can't say I'm actually impressed with what I heard from Wells Fargo.

The Fed has given banks unlimited access to credit at 0.00% rates which makes it nearly impossible and illogical for banks to be losing money right now. The Fed has also added hundreds of billions worth of risk to their balance sheet in order to de-toxify these banks and keep them solvent. But, all of these measures are the equivalent of sweeping a mess under a rug and unless you get rid of the mess and the rug, you still have a mess.

If you remember back to February, the Treasury began a program called a banking "stress test". The stress test is being administered to 19 US banks and financial institutions and are now nearing their completion right as we're getting into Q1 earnings season. The Treasury promised the market's full disclosure after the stress tests were completed. In fact, as the stress tests were beginning Geithner clearly said he expects many of the banks to fail and that they would need large capital injections from the government.

Now what we're hearing from the Treasury is that banks and lenders should not reveal the results of their stress tests. It is no coincidence to me that the Treasury is suddenly changing their tune with just another week to go before the stress testing period is over in the midst of earnings season.

I do expect most if not all of the six major US financial institutions to report better 2009 Q1 earnings compared to 2008 Q4 earnings, but there's obviously a reason why the US government has ordered those banks to keep their mouths shut. I think the stress tests are revealing some catastrophic failing in the commercial real-estate sector in addition to further struggles in the consumer loan sector.

No matter, I see the Treasury printing more USD, the Fed buying more government and corporate debt, more bailouts, and more intervention and stimulus but I believe the government is now attempting to do things a little smarter and more subversive in order to sustain the type of confidence we're seeing in the equity markets presently.

EUR/USD:

Today was really the first day I've looked at the euro since last Wednesday and I see it's made a nice recovery off of its lows but failed to even touch the 1.3400 level. In my view, the EUR/USD continues to follow a trend of making lower highs and lower stabs at the downside, and rightfully so.

I believe the euro's upmove today was just a normal function of the markets and for how price action behavior works... remember that it was sent lower under extremely ill-liquid holiday market conditions, and almost any pair will snap back after making those types of moves without any real market conviction or selling pressure that actually sent it lower, and if there was really nothing to push it down, there wouldn't be much to keep it down.

As far as trading goes, I will wait until all markets are re-opened and functioning normally before I take a trade. I learned my lesson back on Thanksgiving day of 2006 about what can happen when you trade ill-liquid holiday conditions...

It should be noted, however, that the EUR/USD did finally drop back to nearly the point of lift-off from when the Fed first announced it's quantitative easing program a few weeks ago. You may want to check a chart on this, but if I remember correctly, the euro lifted off from about the 1.3060 level, reaching a top at around the 1.3720 level, was tested a few times there, failed, and has now since returned back from where it started.

So, now that we've gotten all that out of the way, once the liquidty levels return on Tuesday and all markets are open for business, we should get a clearer view of the euro's potential short-term moves. I am seeing more of a tighter EUR/Gold correlation lately and this is a good sign I think because that signals market participants may be gaining a more balanced view.

I still maintain an overall bearish view on the JPY and an overall bullish view on the AUD. I think the smart trade for the AUD/USD is to buy it on dips and to selling the yen on any gains it may make.

That's about all I've got right now. On a personal note... I'm still away and may not be home until sometime later on Tuesday. Basically, I'm taking a break from trading, looking at the markets, thinking about the markets, and caring about the markets. As a fulltime trader I've learned one of the best ways to make money is to step away... I know that probably sounds contradictory to how most people make money trading, but for me, I make more money when I take a week or two vacation every now and then, refresh my mind, recharge my batteries, and then get back to the task at hand.

I'll be back home in Nashville for about 48-hours and then I'm going away again at the end of this week. As always, please be smart with your risk and money management and be mindful of the extremely low liquidity conditions... if you see the markets spiking or tanking, just let them run their course, and play the after-effect, that's usually the safest bet.

-David

I'm still away for the Easter holiday and probably won't get back home until Monday evening or Tuesday morning. I don't expect much of anything out of the markets as almost every major market and bank will be closed until Europe starts back up on Tuesday at 0700 GMT.

The only major market open between now and then will be Tokyo. I don't typically trade holiday conditions due to the extreme lack of liquidity and market participation, and over the next 48-hours or so, all markets will be about as ill-liquid as they get all year long.

When I get back home I will write a weekly outlook for what's left of the trade week. If you do plan on trading, as I mentioned last Friday, be mindful of the time of day and do not attempt to chase a market move... my best advice is if you see the market making a sharp price swing during these extremely ill-liquid conditions, just let it do its thing, then catch a few safer pips in the range that will proceed.

-David

I'm getting ready to hit the road and head out to the countryside for the Easter holiday. I probably won't have an update this evening, but I may be around later on tonight in the chat and I will post EUR/USD key levels tomorrow morning.

As far as the markets are concerned, they did what they normally do during holiday trading conditions, which is make those sharp price swings and illogical moves. I believe we've seen the worst of it already today, once London squared their books for the week and closed everything pretty much stopped dropping or surging.

If you are going to trade between now and Friday, I recommend you allow NY to close out and square their books, then allow Tokyo at least 2-hours to get going and get settled. Of course there's always the risk of more sharp price swings due to the ill-liquidity of the markets, but holiday trading conditions can also present great ranges for scalpers. The last two hours of the Tokyo session may also bring heightened volatility, so be on the look out for that as well. 

My best advice is, if you see the market dropping or surging, just let it do it's thing, give it a few 30-minute timeframes to over-extend, and then simply pick a few pips here and there out of the range.

Most global markets will be closed tomorrow, including US and European banks. Keep your eyes and ears open for any additional surprise geo-political events... especially any rhetoric between Israel and Iran, the situation with North Korea, etc. Things are really beginning to heat up around the globe on the geo-political front, most of which is USD+.

-David

Before we get into today's update, I want to cover a community-related topic...

Personal Trading--

I want to comment on some aspects of my personal trading and hopefully put things in perspective and clear up some misconceptions. I don't trade for fun, I don't trade as a hobby, and I don't trade just to put a extra couple of bucks in my pocket each month. I trade full-time and I manage money for other people, people who entrust their earnings and savings to me. I take that aspect along with the risk management aspect as seriously as I take anything in life. In fact, I handle my client's money even better than my own personal funds.

The last thing I ever want to do is have to pick up the phone and tell a client I MC'd their account or that I've gotten them so far into the hole they either need to wire in additional funds or take a big hit. I've had to do that in the past and I never want to revisit that again because the stress of that situation is almost unbearable, and that's not why people give me their money, therefore, I follow strict risk and money disciplines when it comes to trading.    

I need a grand total of just 50-pips a week to hit my goals and live a comfortable and happy life. At $50, $100, and $300 a pip, 50-pips is all I want, all I need, all I look for, and if I hit that in a week, I'm a happy trader and I've got happy clients.

To most retail traders 50-pips a week is unacceptable and laughable, and that's because the vast majority of retail FX traders are severely under-capitalized and they attempt to trade their little $5,000 and $10,000 accounts as if they were $50,000 and $100,000 accounts. With that kind of mindset and lack of risk discipline I can understand why I get some of the comments and email's I do about how I don't call many trades and how I hardly catch big swings in the market, blah blah blah.

Like I said in yesterday's update, I've made every single mistake that you have and every other FX trader have made. I've broken every rule and have made brain-dead trading decisions in the past. But at this point in my career as a trader, there is no margin for that kind of error any longer.

I do not and will not call every trade I take on a personal basis and if I wanted to do that, I'd go back to running a paid-subscription site and that's not happening. It wasn't worth the money when I did before and it won't be worth the money if I did it again.

My vision for this community, which is shared those who've put in a tremendous amount of time and energy to build this place and keep it going, is focused directly on trading, but that doesn't mean trade calls all day long, that means making smart trades, high probability trades... it means staying on the right side of the market, staying one step ahead of the market's underlying fundamentals. It means being a student of the markets to learn what they have to teach us about trading and how to be consistently profitable. It means solid and accurate market analysis and forecasting, accurate key levels to give us a working foundation and point of reference, and most of all, knowing when not to trade.

If all that means there's just 5 dedicated traders in our chat, so be it, that's wonderful. The only thing I ask is, before I get any more email's from individuals who think they're somehow entitled to get a couple dozen trades handed to them on a silver platter each week, even though this is all free, please remember me and the other head traders are approaching this market as a profession, not a hobby. I can tell you this, the fastest way to go broke in this market is by trying to get rich in this market.

Wall St.:

As I mentioned earlier this morning in the prior update, I was skeptical we'd see the Dow and S&P 500 do a repeat performance and drop another 2%, and we saw all US equity indexes put in a decent performance on Wednesday. Approximately 8 out of 10 S&P 500 stocks were up on the day with the index closing almost 2% to the upside. The Dow also managed to finish strong, closing up 48-points.

FOMC--

This afternoon the Fed released a mini novel otherwise known as the FOMC meeting minutes. I used to complain that the minutes were too short and vague and now the Fed's given us a much more detailed look at exactly how they plan on continuing to destroy the USD and how they'll carry on the process of manipulating financial markets, price-fixing assets, and pumping trillions worth of cheap and easy credit to re-inflate the US economy.

I'm liking the new and somewhat transparent Fed because it makes my job a whole lot easier... instead of me having to read between every line to find all this economically destructive info, Bernanke's pretty much laying his cards on the table.

Here's some of the highlights and low lights from the FOMC:

• Deepening concern for downside risks to the economy
• Tight credit conditions
• Fragile and unsettled financial markets
• Tight credit conditions persist
• Intensifying pressures on financial institutions
• Further decline in foreign economic activity
• Expansion of the Fed's balance sheet
• No sign of a bottom in housing
• The unemployment rate rising steadily into 2010
• Consumer spending to remain weak through 2010
• Fed will buy another $750 billion worth of Freddie and Fannie debt
• New bail-out money and programs for insurers
  

I think you get the picture... most of this stuff we already knew, there are no real surprises here, but I think when we do read between the lines we see a Fed that stands ready to add at least another $1 trillion to its balance sheet in order to stabilize the financial markets.

The Fed will continue to spike the monetary base, buy government debt and take on the riskiest assets floating around the markets, they are very clear about this. None of it is good for the USD but the surge in M3 money-supply won't actually begin to cause inflationary effects for at least another 9-months in my opinion. The billions of USD that's hot off the presses are going on the balance sheets of insolvent corpses like AIG and Citi. But at some point in the near future CPI and PPI will begin working their way back up as commodities rise in tandem.

While we're still in a season of deleveraging and writedowns the Fed will continue throwing cheap money and easy credit into the economy and financial markets, but I think they've put a train on the tracks they won't be able to stop once it starts rolling full steam ahead and I forecast in 2010 or 2011 the dollar may test lows on the USD Index not seen for sometime, maybe ever. There may not even be such a thing as the US dollar in 2011... at this point I think anything is possible and truth is always stranger than fiction. 

EUR/USD:

For most of the trade day there was a clear shift in risk aversion and market sentiment as the USD and JPY saw some strength, while the EUR/USD, EUR/JPY and GBP/JPY took some more hits even though equities had a relatively strong day. I really have no explanation what's brought on a slight shift in sentiment but I don't think we can rule out seeing more of it through the rest of the week. 

Gold made another stab at the $860 level before failing and moving back up. If I remember correctly, the $860 level has been fairly solid support since the start of 2009. You may want to check a chart to confirm this but I think if gold can break through that level, it could easily move under the $840 level. Speaking of failures, the AUD/USD continues to fail between the 71.30 to 71.50 level, so I would look to that area as near-term resistance. A sustained break above should open the door to target the 72.00 level and a sustained break below the 70.20 to 70.00 level could easily send the pair to test 69.60 or lower. 

As far as spot crude is concerned, I think we saw a fairly textbook short-squeeze scenario play out as crude bulls took advantage of Wednesday's crude inventory to push the commodity from the $47 level to over $52 before dropping back to range around $50 in late afternoon.

German recession deepens--

This morning new data showed German exports dropped yet again in February, which marks five consecutive months of losses. Imports into Germany sank by 4.2% in February and this also shows how bad the recession is in Europe's largest economy. Germany used to be a powerhouse exporter within the Eurozone but the latest data shows German exports within the Eurozone plunged 22.5% year-over-year while their exports to non Eurozone markets dropped 21%.

The German manufacturing sector showed the worst decline in history, falling 3.5% from the prior month while orders for German manufacturers hit the floor, dropping 38.2% year-over-year. And yet somehow the euro magically holds on to some of the ground it made up on the dollar after the Fed first announced their quantitative easing plans a few weeks ago.

Erin Go Broke--

I'd be remiss not to mention the disaster in another Eurozone hotspot, Ireland. This morning Ireland's finance minister announced a new government plan to rescue insolvent Irish banks who overleveraged themselves in a risky real estate market. The Irish government will take on the USD-equivalent of $119 billion in property loans from banks. Irish home prices are down 20% while commercial prices are down 37%.

I'm sure there are more details, I don't know them all, but in my opinion this is a game of Russian Roulette the Irish are playing. Ireland's debt-to-GDP ratio is already near third world levels and any expansion of government debt intensifies the risks that are already there. There are still quite a few market participants in the Eurozone who believe these issues are isolated to eastern Europe but I'm hoping this is a real eye-opener.   

Trading--
 
Keep in mind we have the Easter holiday and liquidity the rest of the week will be non-existent as many market participants will be on holiday. With the lack of liquidity and on going geo-politics, expect some sharp price swings and illogical moves in the markets, especially in FX.

Fundamentally, Thursday is actually a big day for euro and dollar data... out of Europe we get German Industrial Production, which I'm expecting to print worse than expected, and for the US we get the Trade Balance, Initial Claims, and Import Price Index.

That's all I've got for now. Key levels will be posted in the morning, and as always, please practice smart risk and money management in your trading.

-David

Last year I used to do some live audio Q and A sessions and it was always very well received by traders and we're going to begin those again. I really like doing the live audio stuff because it's a thousand times easier for me to talk about the markets instead of typing things out in the chat or in our blog. 

When I do these live audio Q and A's I typically do not prepare anything ahead of time and I prefer to go off the cuff and handle each question as it comes in. If market conditions allow, we will do our first audio session on Monday at 1500 GMT / 1000 EST / 0700 PST. I'd like to try to stick to Monday's at 1000 EST if possible.

To get in on the live audio session, just be in the chat, click the audio button, and you'll be connected, very simple. In meantime, think about some questions... I'm pretty much open to answering anything market related and hopefully we can have a great session tomorrow. 

-David

This morning after Treasury Geithner referenced a weaker dollar/sovereign reserve currency comment, the EUR/USD went soaring and I started buying. I put my first buy in the chat which was at 1.3598. Then Geithner backtracked on his comments and said he believes in a strong dollar. Of course the market drops, then the PM's start coming in. This time the panic was not so much about the drawdown but about where they should either take a loss or add another long.

That kind of stuff messes with my concentration and frame of mind. I want to be clear that I do not tell any trader how to manage their risk and capital. I do not offer this service to tell traders the best way to manage their risk and where to enter/exit the market on a position. Asking me that when I'm in the middle of a trade call is going to result in a ban from the chat room. It might sound harsh but it's zero tolerance, we're professional traders not an FX daycare center.

Overleveraged, undercapitalized--

It's the same problem as usual -- overleveraging. For example, this morning one trader didn't even know how to do the math to figure out his usuable and once we did the math together we figured out he was making almost 5% used margin entries on an account that had under $7,000 in equity. That account is far too undercapitalized to handle those monster entries and it's no wonder the market causes traders to panic and act stupid when trades go 50 or 80 points against them, which is nothing in this volatile market.

Traders complain about making lower-risk entries, about how they can't make any money using smaller entries, so they make entries so big it puts them in a game they can't play in and a battle they will never win. The higher the leverage, the bigger the margin, the faster the account gets wiped out. There's a reason why only 10% know how to consistently win in this game. 

The vast majority of retail FX traders are far too undercapitalized to even be playing in this market to begin with and probably don't have the emotional strength anyway, and they make $250 liquid entries with $5,000 of total risk capital. Trading that way will mess with a trader's head and make them do stupid things and throw money away, ultimately it's not worth it. But, the thinking always is, I'll get it back next time... It won't work and traders that have $5,000 in equity cannot survive this market when they try to make $5 a pip. 

More trade calls--

From here on out if I make a trade call please do not PM or email about where to exit or enter a trade or how I think you should manage your risk. If we can cut out all that needless stuff then I can become more comfortable calling multiple trades at one time. Whenever I put a call in the chat it's typical I take at least another trade with it, and then if there is drawdown on the trade, depending on market conditions and what's causing the drawdown, I may add one or two more trades.

Up until now some traders have panicked over 1 trade call so I don't want two or three times the stress. But if traders can be good risk managers I can put a second and third trade into the chat and SMS. For example, on the 1.3598 call, I added a euro long every 20-30 pips down, all the way to 1.3520 and I closed them all out at 1.3606. I would have loved to have put those additional calls in the chat but not when people stress over 1 call.

If I called in the chat all the trades I take on a personal basis the trade log would look faked, like we are fudging the numbers. I want trading to be the #1 priority of this community and that means anybody that decides to join us should understand we take trading very seriously, it's how we pay the bills and put food on the table.

That means we work hard to call high probability trades that have as minimal as drawdown as possible. Not every trade is perfect, some experience drawdown, but we don't panic, we manage the situation and ultimately capitalize on it. There's a lot of great traders as members of our community that have the P-and-L's to back up what I'm saying. 

AUD/JPY Trading:

Just a quick FYI -- this post will serve as my explanation for how and why I'm going to trade the AUD/JPY. I'll do my best to explain the method to the madness, but this will be the one and only explanation for how I trade this beast. 

A couple weeks ago I said I was looking at the AUD/JPY pair and if I was able to find a specific nuance within it's price action patterns and price behavior that I would add this pair to our product mix. I was fortunate to find the specific nuance and characteristic I was looking for, I've tested it with live money only, and today I made our first official call on that pair. The call is in the Trade Log and for those that held on past the official close could have taken in excess of 70-pips profit.

For the past few years I've been telling traders to change their thinking and to look at the market with a different set of eyes and see what a difference it makes. I took my own advice and started to look at the AUD/JPY. My theory was I should able to apply my basic trading criteria to that volatile pair and I would be 90% of the way there in understanding how to trade the pair. The other 10% is comprised of those specific nuances and characteristics that make each pair it's own unique personality.

Historical data tells us 90% of all retail FX traders that trade the AUD/JPY ultimately lose. So, the way I figure it is, there's something that the 10% know that the 90% don't know, and if I know 90% of what the 10% do not know, I just need to figure out the 10% that makes the pair it's own unique market.

My methodology for trading and philosophies on the market have been mocked before, it's not a big deal at this point, so if this sounds crazy too, so be it, I don't care. Anyway, I burned my brain out trying to find that once specific nuance. What I needed to find would allow me to combine it with my normal trading criteria to get the data I need to determine probabilities on long and short entries at any given level, under any given market condition.

My next idea was to look for the answer with the wisest person that ever lived. Religious and non-religious historians all say that King Solomon was the smartest, wisest and richest man that ever lived. They said he could talk to animals and that he was the world's first and foremost diplomat and politician. And that's the part where I figured he might have the answer I was looking for in something he wrote.

In his writings Solomon explains business, politics, diplomacy, and human behavior. It's within the summation of his wisdom on using diplomacy to subdue your enemy that I discovered exactly what I was looking for to trade the AUD/JPY.

Long story short, in addition to my normal criteria for price action trading, I saw that I could use the traders in the AUD/JPY market in order to capitalize on the element of surprise, and take the opposite of what the depth of liquidity in the market is doing as supply begins to exceed demand.

The AUD/JPY market is incredibly ill-liquid and traded on a very technical basis. That's great, automatically I see blood in the water. Knowing it's ill-liquid and extremely volatile is even better. That's exactly what I like when I apply this style of trading to a pair.

One of the key added components I started using was market depth and order flow for the AUD/JPY and I use the trader's over-supply against them. That's the best and only way I can explain it at this point. In an ill-liquid market traded by technical traders the core issue of supply and demand is either ignored or unnoticed, but most of the time it is completely misrepresented on a candle chart and miscalulated by the most common technical indicators used by AUD/JPY traders.

Knowing this, I just turn the tables using probabilities based on human behavior price patterns for the last 22-years the AUD/JPY has been traded. That's it, end of story. I'm not here to teach it, I'm just here to trade it. Traders that want to learn the pair can learn it by trading it.

If anybody has any questions about AUD/JPY trading, please let me know. You can email me or post your question in the chat as long as I do not have a trade call open. Thanks.

-David

For the most part the markets saw steady rounds of profit-taking across the board in all markets. After Monday's massive gains, market participants were doing as they normally do. Asia may follow suit this evening as well. I wouldn't call today's drop in equities the end to the bear market rally or the bear market...

ECB hints at following Fed:

I'm not sure how much attention this received on the financial networks, but I think traders should take note of the following rhetoric on quantitative easing from ECB Papademos:

"This is an option which could be considered, the pure quantitative easing, in case the more traditional means for implementing monetary policy have been utilized."

ECB's Weber, Orphanides, and Papademos have all given rhetoric in favor of loosening credit even further for European banks and now we have Papademos talking about the ECB using quantitative easing to devalue the euro and keep interest rates at artificially low levels.

There really isn't much more to say, I think the ECB has made things clear and now it's safe to say euro devaluation is on the table for the future. The ECB has been talking the euro down all week and I will be watching and listening for what kind of rhetoric they use as we get closer to the next ECB rate meeting. No matter what, this new rhetoric out of the ECB puts added risk on the euro.

Fed begins quantitative easing Wednesday:

The Fed is not wasting anytime devaluing the dollar and flooding the Treasury supply... tomorrow they begin the long process of buying at least $300 billion in Treasuries throughout 2009. The Fed is going to sell $98 billion in Treasuries this week and they will specifically be buying 7-year and 10-year notes on Wednesday.

Why those two Treasuries? Simple, they are tied directly into mortgage rates. And what does the Fed want to do with interest rates? Use them to re-inflate the housing market by price-fixing mortgage rates, providing 0.00% loans, easy credit terms, and backing to push banks to start writing mortgage loans to consumers.

Remember when Bernanke said he would rain down dollar bills out of a helicopter to stimulate the economy if he had to? Well, that's exactly what he's doing through this Treasury buying program. Ultimately, this plan will fail and the mess it creates will likely be beyond what the Fed, Treasury, and US government are capable of fixing. It will be too large for them to print their way out of like they're doing this go around.

The Fed is buying Treasuries on 27 and 30-March; 1 and 2-April. The money-flows that come in and out of the Treasury market will likely have an impact on FX, equities, and commodities, so keep this in mind. The Fed says they are buying $300 billion worth of Treasuries but I don't believe them. I think they have to buy three or four times that amount.

The deficit is already in the trillions and that automatically make US debt very unattractive. All of the money printing makes US debt extremely unattractive because money printing is pure inflation and inflation is the enemy of bonds. China is running their mouth about the deficit/Treasuries situation. China called for the IMF to create some kind of super reserve currency to replace the dollar. I think this is the Chinese blowing off some steam, and just another bark, not a bite.

It's not in China's interest to cause too much panic in the currency market. They know they hold the power to send the dollar on a free-fall with a few choice words and I don't see them using that weapon at the moment. At one point during the Bernanke/Geithner testimony this afternoon I thought I heard them make some obscure reference to the idea a new currency might be a good idea... weird stuff going on...

These geo-politics and underlying fundamentals will continue to keep command in the markets the rest of the week and all traders should manage their risk accordingly with this in mind.   

EUR/USD:

I mostly traded all day and really didn't pay much attention to any of the correlated markets like equities or commodities. These markets are moving based on all the geo-politics, changing fundamentals, and the many emotions that drive traders to make the decisions they do.

At 2000 EST this evening Obama will address the nation on economic issues and we could see some volatility from this. Fundamentally, we get German IFO, Core Durable Goods, New Home Sales, and Crude Inventories. I believe German IFO and New Home Sales may print at or better than expected, while Durables may come in weak.

The data may not matter much as the central bankers will use the primetime of the markets to hit the newswires with rhetoric at opportune moments. These central bankers might be idiots but they are smart idiots when it comes to this stuff...

As far as trading goes, exactly what we did today in the chat is exactly how I plan on trading the rest of the week. I'm not a bull or bear, today I decided to fight with the bulls and I just waited for the bottom of each move to buy and then take profit on the move up. These market conditions are very choppy and I prefer to stick with a safer way to trade until things stabilize. 

Use smart risk and money management because the closer get to the end of Q1, the wilder the market conditions will get.

-David