Trading has been relatively quite ahead of the FOMC rate statement on Wednesday. I missed some decent GBP moves today, but managed to scalp the $1.06 USD/CAD round number. Total take for today’s trading was 31.2 pips, nothing too exciting but a profit is a profit. There is nothing on the long term horizon that looks interesting to me this evening. I suspect some fun over the next few days though, best of luck this week!

Howdy Traders,

This week’s video deals with a losing trade, the CFTC’s proposed regulations, and combining technical reasons to trade with fundamental reasons to trade. I hope your having a fantastic weekend, and best of luck next week!

Earlier this week the United States Commodity Futures Trading Commission (CFTC) proposed several new, and highly unpopular regulations aimed at off-exchange retail FOREX transactions. The proposed regulations are “important steps in implementing the additional consumer protections authorized in the 2008 Farm Bill” according to CFTC Chairman Gary Gensler. The off-exchange retail currency market, or FOREX market had been unregulated within the United States, but that changed when the CFTC Reauthorization Act of 2008 was enacted as Title XIII within the Food, Conservation and Energy Act of 2009, commonly referred to as the Farm Bill. The act sought to clarify and enhance the CFTC’s jurisdiction over off-exchange currency trading, and since then the CFTC has enacted a number of new regulations on the FOREX market. In 2009, the CFTC eliminated hedging, restricted margin to 100:1 and enforced first-in-first-out (FIFO) order execution. The latest proposal takes regulation to a new level, and many traders are expressing tremendous frustration with the CFTC’s entrance to off-exchange trading. Having read the 193 page proposal, I thought I’d weigh in on the matter in today’s post.

What’s In the Proposal?

There are several regulatory changes proposed, however one in particular related to leverage is receiving the most attention from FOREX participants. If you haven’t read the proposal, I encourage you to do so. You can find the press release and Federal Register via this URL:

http://www.cftc.gov/newsroom/generalpressreleases/2010/pr5772-10.html

Here is a link to the entire CFTC proposal:

http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/forexrulesproposal.pdf

If you don’t have time to read 193 pages of government speak I’ll do my best to summarize them for you.

Registration Requirements

Under the proposal, trading counterparties (dealers) offering retail foreign currency contracts would be required to register as either futures commission merchants (FCMs) or retail foreign exchange dealers (RFEDs).  I don’t think most people will have a problem with this, for years I’ve recommended doing business with dealers who have voluntarily registered as FCMs with the NFA. All the major dealers in the United States have already done so. Along with dealers, anyone who solicits orders, executes trading authority or operates pools with respect to retail forex would be required to register as a commodity trading advisor (CTA), commodity pool operator (CPO), introducing broker (IB) or as associated persons of a registered entity.

I personally welcome these registration requirements. I remember the onslaught of enforcement action notices the CFTC sent out during 2008 and 2009 as they busted one currency related ponzi scheme after another. It made me sick to see so many people taken by dirt bags who used the unregulated currency market as their play ground to open questionable managed funds.  The off exchange currency market has been a playground for scammers who promise huge gains, with little risk, without oversight for too long. If you want to manage people’s money in the FOREX world, or introduce them to do business with a specific dealer, I think it’s about time you get registered.

Capital Requirements

Under the proposed regulations registered FCMs or RFEDs would be required to maintain a net capital requirement of $20 million, plus 5% of any amount they are liability to retail forex customers exceeding $10 million. This requirement is aimed at shoring the financial stability of dealers. For most major dealers in the United States this requirement will not be a big deal. The only major dealer who had people concerned about their net capital levels was Interbank FX, but they appear to have shored up that issue. The CFTC reports on FCMs financial strength monthly with the last report posted on November 30^th, 2009.  Using the latest CFTC report, the net adjust capital of major currency dealers operating within the United States is listed in alphabetical order below.

Clearly Interbank FX is still on the lower end of the net capital requirements, but above the $20 million minimum. However, several currency dealers on the FCM financial list do not meet the $20 million minimum capital requirement, and will presumably be unregistered as FCM’s if they are unable to increase their net capital balance should these rules be put into place. I highly encourage you to monitor the financial data of your currency dealer. If your dealer is below the line, you should consider moving to another FCM registered currency dealer. You can find the report at this URL:

http://www.cftc.gov/marketreports/financialdataforfcms/index.htm

Disclosure Requirements

Under the new proposed regulations all retail forex counterparties and intermediaries would be required to “distribute forex-specific risk disclosure statements to customers, and comply with comprehensive recordkeeping and reporting requirements”.  I see no threat to the retail trader in that proposal. It should be no surprise to anyone in this business that currency trading; off-exchange is one of the riskiest forms of trading available in the retail financial markets. Regardless, there is always someone who needs to hear the warnings.

Margin Restrictions

Finally, the proposal that has the currency trading community in fervor is related to margin requirements. Under the proposed regulations, all retail forex customer accounts in the United States would be subject to a maximum leverage of 10:1. This means a vast majority of retail currency traders would suffer a ten times increase in their margin requirements, assuming they use 100:1 leverage. In plain terms, if you use 100:1 leverage you are able to control a $100,000 standard sized currency lot with $1,000 in your margin account. At 10:1, you must maintain $10,000 per standard lot. The same holds true for micro and mini accounts, where I would wager most retail currency traders are trading these days. Under 10:1 leverage a trader would need to maintain $1,000 for every $10,000 mini lot, or $100 for every $1,000 micro lot traded. The increase in margin will also translate to a decrease in pip value, modifying the overall profit and loss per pip on every trade. The CFTC’s seeks to reduce the damage a trader can do to their capital by reducing the leverage available to them, all in the name of consumer protection. Traders however, are expressing a “leave me alone, I can handle it” attitude toward the proposed change.

Is this the Death of Retail Currency Trading in the United States?

Francesc Riverola, CEO & Founder of FXStreet.com, and many of my fellow bloggers at FXStreet.com have been very outspoken over the proposed change to margin requirements by the CFTC. Francesc correctly pointed out in a recent blog posting when he wrote:

“CFTC to Kill US Retail Forex Market

How do they pretend traders not going offshore and forcing to close their doors to all US FDMs by limiting leverage 10 to 1???? while overseas you can have much bigger leverages like 200 to 1 in UK????”

- Francesc Riverola

Major currency dealers are so concerned the margin requirements will kill retail trading in the United States; they have formed the Foreign Exchange Dealers Coalition (FXDC) to provide a unified front in Congress. The Coalition released a statement against the CFTC’s proposal which can be found by clicking here. The statement clearly lays out a case for retail currency trading in the U.S. as a $1 billion industry, providing solid jobs, growth and their concern the margin change will drive small retail customers offshore. The result will be less fraud protection for the retail trader, a loss of jobs in the United States, and no significant gain in consumer protection as a result.

Where do I Stand on This?

I encourage the CFTC’s effort to reign in the actions of unscrupulous currency dealers, IB’s and money managers. If you want to manage money, or execute authority on a clients account you should be registered. I also believe the capital requirements are necessary and ultimately weed out weak dealers from the business. Perhaps this will limit consumer choice to a few big dealers, but I believe the protection offered is worth it. I’ve been around long enough to remember the REFCO FX debacle.

Regarding margin requirements, I am adamantly opposed to the proposed restrictions. I believe in personal choice, and personal responsibility. If you do not understand the damage you are a capable of doing through the use of high leverage, you should not be trading. It is your responsibility to understand the market you are participating in, practice diligently and protect your capital before placing a single dollar at risk. If you trade without regard to the risks, and lose your shirt, it’s your fault. Regulating the leverage available across the board punishes everyone in the name of protecting the lowest common denominator among traders, and that frustrates me. I go out of my way to warn traders about the risks of trading on margin, and so will any reputable FCM, IB, CTA or CPO. Unfortunately, even if you lead a horse to water you can’t make it drink. Even at 10:1 leverage there will be traders who blow out their accounts, some people never learn. I do not want my choice of leverage limited in the name of consumer protection. There are many retail traders who have jumped ship overseas already, and I may follow them if these regulations are enacted.

I believe these proposed changes, if enacted will actually have a negative net affect on retail currency traders. Instead of protecting the consumer, the CFTC’s actions will drive small volume retail traders to overseas dealers where leverage can be as high as 700:1! There are also unregulated dealers overseas who will take advantage of retail traders seeking 100:1 leverage. The Foreign Exchange Dealers Coalition is correct in their statement saying:

“Unregulated dealers from around the world will also be the beneficiaries of the 10 to 1 leverage rule. These unregulated forex dealers don’t have to worry about capital requirements, risk management models, marketing ethics, dealing practices or even returning a customer’s funds. These dealers will be out of the reach of the CFTC and they will thrive.”

FXDC Statement against proposed 10:1 leverage restrictions

How Can You Comment?

If you would like to comment on the proposed changes, I highly encourage you to contact the CFTC within the next fifty days and voice your opinion. Ensure you identify your comments with the regulation number RIN 3038-AC61. You may submit your comments to:

secretary@cftc.gov

Include “Regulation of Retail Forex” in the subject line of your email.

Additionally, you can submit your comments via mail at the following address:

David Stawick, Secretary, Commodity Futures Trading Commission

1155 21st Street, N.W.

Washington, DC 20581

All the comments received by the CFTC will be posted without change to http://www.cftc.gov, including any personal information provided in the comment.

The Bottom Line

I can’t stress the importance of letting your voice be heard. If you do not want your margin requirements to increase, if you prefer flexibility with leverage, I suggest you speak up now or be prepared to trade with 10:1 leverage in the near future. Your only other alternative will be to increase you capital, or go overseas.

I hope you had a great week of trading, and have a great weekend!

Ryan

Canadian loonie lost ground against the United States dollar and Japenese Yen today following mixed fundamental data, and a drop in oil. The market consumed data from Canada’s housing sector as well as the Bank of Canada’s Business Outlook Survey, which is released quarterly. The fundamental data was mixed and speculation over Canada’s economy recovery continued, especially after last week’s disappointing employment data. Canadian building permits fell -4.6 percent in November versus an expected fall of only -2.6 percent, a decline attributed to decreases in non-residential building permits. Meanwhile, residential permits rose 9.1%. CAD’s losses put the currency into an area I refer to as bargain hunting territory, giving me something to ponder for today’s post.

Taking a holistic look at CAD, the fundamental and technical pictured combined isn’t that bad. The business survey points out that more than 70% of firms surveyed expect their sales volume to increase over the next twelve months. Other interesting tidbits from the survey include the following:

• 42% expect higher machinery and equipment spending.
• 54% expect their employment levels to be higher.
• 42% expect prices of products or services purchased to increase.
• 38% expect prices of products or services sold to increase.
• 61% expect an inflation rate of 1 to 2 percent.

The inflation data is interesting considering almost half of the firms surveyed believe their cost of goods sold will increase, but only 38 percent expect to pass that on to the consumer.  The Bank of Canada points out that while firms expect output prices to grow at a faster rate than the last twelve months, some firms may have trouble increasing prices to match the higher cost of goods.

“On balance, firms also expect their own output prices to grow at a faster pace than over the past 12 months. For many firms, this reflects the end of a period of price discounting, as they plan to keep prices stable or try to partly reverse past discounts to restore profit margins. Some firms plan to pass on part of the higher cost of inputs to customers, although, for others, the ability to raise prices is limited, given soft market conditions.”

-          January 2010 Business Outlook Survey, Bank of Canada

Overall, the survey suggests that Canadian executives are rather optimistic about the next twelve months.

Sweet, Sweet Crude

Another interesting chart related to Canadian dollar is the West Texas Intermediate Crude daily chart. Last week WTI broke through resistance at $82, and today $82 is being tested as support. Should $82 hold and oil continue higher, loonie may benefit.

Data on Tap

Tomorrow Canada will see Trade Balance data, which is expected to show a positive gain. The market also expects to see trade data from the United States which makes me more interested in CAD/JPY than USD/CAD today.  Both USD/CAD and CAD/JPY have moved into what I call bargain hunting territory, but CAD/JPY would be free of fundamental influence from the dollar. Trading cross pairs to remove fundamental pollutants is something I talk about in my book, Making Money in Forex. The next twenty four hours could provide a decent example of this process in action.

Of course, I could be totally wrong. It is hard to ignore the speed of today’s CAD/JPY sell off. Today’s price action wasn’t a meandering Sunday stroll into bargain hunting land, rather it was fierce 100 pip slaughter fest taking only five hours to fall.

Best of luck,

Ryan

Stop losses are an effective tool for managing risk, but placing stops incorrectly may take you out of a good trade too early. Stop losses should protect your account from risk, but only when your trade idea is truly broken by price action. Additionally, traders often assume, larger time frames require large stop losses which simply isn’t true. In this weeks trading video,  I demonstrate a few simple tips to improve your stop placing skills.

Today is the last day of 2009! I’d like to close out this year of blogging with a handful of trading resolutions I’ve made for 2010. New Year resolutions without context or a plan are little more than wishful thinking. I like to begin with a retrospective look at the prior year to determine what worked, and what should be improved in the New Year. Then it’s time to lay out a plan for making it happen in the New Year. After reading my list, consider what you need to improve in 2010. Create a plan with specific, measurable goals you can realistically attain to hold yourself accountable in the New Year. I think it would be fun if you shared your goals with us by commenting on this article below.

Improve my Skills When Adding to a Winning Trade

I’ve never been efficient at adding to a winning trade, or “stacking” as some traders call it. I’ve always been a traditional risk-to-reward based trader, but I see the value of starting a position off small and adding to it as the market confirms your trade hypotheses. Unfortunately, I stink at stacking.  This year I have developed a couple of ideas about how to fit stacking into my current trading strategies, but I’m still not 100 percent confident in my ability to execute them properly. In 2010, I plan to mirror my live trades with a demo account which will allow me to practice stacking a trade in real time, alongside my live money trades. That will help me determine whether or not my techniques will work, or if I need to go back to the drawing board.

Maintain a Consistent Trading Journal

In 2009 my personal record keeping was horrible. I slacked off from keeping a regular trading journal, and I’m confident that lack of discipline crept into other areas of my trading. I need to take my own advice and ensure my trading journal is kept up to date in 2010. Trading journals are important tools regardless of your trading skill level because they offer a wealth of information beyond profit and loss.

Stick to My Profit Targets

This year I closed a lot of trades prematurely, which hurt my overall risk-to-reward ratio. This could be due to an overall lack of discipline this year, or it could have been an emotional reaction to the volatility we saw in the spot market. Even experienced traders can get into ruts of bad behavior now and then. Whatever the reason is, in 2010 I need to be vigilant to select a high probability profit target, and ensure I stick with it through the very end of the trade.

Diversify into other Markets

I’ve been interested in trading currency ETF’s and options for a little over a year now. I meant to get involved with those markets earlier, but got wrapped up in writing my book this year. In 2010 I’d like to explore some covered call strategies and much longer term currency plays using EFT’s and spot monthly charts.

Trade Very Long Term Charts

The majority of my trades in 2009 were planned using daily charts. The longer I trade, the less interested I am in spending time with charts. In 2010, I intend on trading with a much longer term view. The majority of my trades will be planned and executed using weekly and monthly charts.

Continue Improving my Blog

This isn’t necessarily a trading goal, but definitely something that is very important to me. In the New Year I will finally develop the educational section I’ve wanted online for a long time. I will begin a series of free webinars on the weekend so people who work full time can attend. Finally, I look forward to writing more content, more frequently and closing the week out with a video every Friday.

In closing, I would like to thank all the readers who visit this blog, post comments and send me emails. Without your interest and involvement, this blog would be awfully boring to maintain. Since starting this blog in October, 2007 it has grown to a community of over 1,300 traders, from twenty-five countries, who visit every month. Thank you for sticking with this blog through the slow months while I focused on finishing my book. I’m looking forward to helping develop your trading skills in 2010, and hopefully I’ll have the chance to meet some of you next year as well.

My best regards to you and your family on this New Years Eve. I wish you a healthy, peaceful and prosperous New Year!

Ryan

The United States Dollar Index monthly chart is the most interesting chart I’ve looked at today. The dollar has successfully beaten up most major currencies in December, and appears to be ending 2009 with a solid bull pattern along demand established in 2008. The market appears to be content betting on an accelerated recovery in the United States, but the question remains, will this trend continue or is this a dead cat bounce? The Dollar Index is trading at resistance near $78.00, and could easily turn lower from here.  So far, it appears the market has pushed above this resistance on the weekly chart. With the markets in holiday mode, and volumes thin, it is hard to tell at this point whether the break above resistance at $78 has teeth or if dollar is simply benefiting from thin volume.

Personally, it is hard for me to picture a long term trend of dollar strength. The United States Congress seems set on “saving billions, by insuring millions” through health care reform, while aggressively spending every dollar they can collect or print. That being said, price is never wrong, so if the market wants to go higher in the short term I’m happy to ride along. This week, the market will get data on United States third quarter GDP, durable goods, and existing and new home sales.  Considering the current sentiment seems to be banking on an accelerated U.S. recovery, any shockers in this data could take the wind out of dollar’s sails. So how could we play this?

CAD is the only major currency that hasn’t been totally slaughtered by the dollar over the last few weeks. It has remained stuck in a consolidation range just above the key price pivot of $1.04. This morning the market saw retail sales data from Canada that wasn’t on par with the expectations of a hot recovery in progress. The retail sales numbers came in on target, but core retail sales slipped 0.2 percent. Automotive sales at new car dealers rose 3.6 percent however non-automotive retail sales slipped 0.2% in October. Declines were also seen in food and beverage (-1.2%), pharmacies and personal care (-0.9%), and beer, wine and liquor store sales (-2.2%).  I suppose one could argue if the economy is improving, the need for Crown Royal or Grey Goose Vodka would indeed drop. Canada will release GDP data on Wednesday, but that is it. With the retail data at expectations or below, that may open an opportunity for the dollar to gain ground fundamentally on the loonie this week. It is worth noting, all of the gains made by the loonie overnight were erased by dollar bulls during New York trading today.

Keep an eye on the USD/CAD, this pair is bound to breakout at some point.

Best of luck,

Ryan

We all know the dollar has accomplished quite a comeback on the heels of positive jobs, and retail a sales data, the question is will it continue? Looking at the EUR/USD this weekend the currency appears to be at a decision point. If the euro is going to find its footing technically and avoid a full blown assault by the dollar it needs to happen soon. Today’s EUR/USD chart shows the currency is clearly poking at a demand level which corresponds with a minor trend line on the daily chart. The top of this demand zone sits at $1.46 which provided support for the recent run to $1.51. If the euro has hope of a comeback, this is a demand zone of interest. If not, I think the euro could be vulnerable to fall further toward support at the bottom range near $1.4450.

I spent the morning scalping USD/CAD following the news Canadian building permits rose 18.0% in October versus an expected gain of only 1.1%. The increase accounts for $6.1 billion in permits, primarily in non-residential construction, although single-family dwellings grew as well. Overall, non-residential sector construction permits were up 42.4% after declining 9.2% in September. When I read this, I have to admit my first thought was “government projects”, but the report states non-commercial permits were primarily driven by construction intentions for office buildings, retail stores and warehouses. Perhaps a sign businesses are more interested in infrastructure investments, given the recent numbers in retail sales.

Bank of Canada Rate Decision

USD/CAD has ranged for nearly four weeks, and the larger picture paints tighter consolidation on the daily chart. Today’s price action ended decisively lower with a potentially bearish price action pattern. The pair needs a major fundamental kick in the pants to break from its current trading range; the rate statement may be just what the pair needs. Support is seen near the daily chart range low and again at $1.40, although I believe $1.40 is probably minor support by now. There are no major economic reports for the dollar tomorrow, so this currency pair is definitely one to watch. Anything can happen with a rate statement announcement, so be prepared for a long or short opportunity. I’ll be watching tomorrow morning for a fundamental bargain hunting opportunity.

Best of luck,

Ryan

The Labor Department’s Non-Farm Payroll report was released this morning, and the numbers surprised the market. According to the Labor Department, the United States lost 11,000 jobs versus and expected loss of 119,000 while the unemployment rate fell 0.2 percent to 10 percent even. The numbers are being touted in media reports as a sign of hope “for a sustained economic recovery”, but does anybody really believe the Labor Department? The underlying data still paints a difficult picture for job seekers. The number of people unemployed for at least six months rose last month to 5.9 million. The average length of unemployment is now more than 28 weeks, and there are still 15.4 million unemployed people.

On Wednesday, ADP released their employment report which is a stark contrast to the Labor Department’s report posting a lost of 169,000 jobs. Deviations between the ADP data and the Labor Department’s data are common but this is one huge deviation.According to ADP the services sector lost 81,000 jobs while the Labor Department reported a gain of 58,000 jobs. Manufacturing jobs were similar with ADP reporting a lost of 44,000 an the Labor Department reporting a loss of 41,000 jobs. The Labor Department counts 7,000 government sector jobs that ADP does not.

The market’s reaction to the Non-Farm Payroll data is the most interesting I’ve seen in a long time. Initially the reaction in the equity markets was predictable with futures shooting up and equities up over 100 points in early trading, but the Dollar was bought aggressively during this equity rally which in my opinion is counter intuitive. If the market was truly adverse to risk in the wake of positive job numbers I would expect to see Dollar sold against the risk pairs such as AUD, NZD. As it turned out, Dollar rallied and the Dow is currently trading in negative territory.

I think the initial rally was a knee jerk response. I don’t think anybody believes the Labor Departments numbers. Anybody that doesn’t realize the government routinly cooks their books worse than Enron should spend some time reading what qualifies as “non-farm job”, but this report in particular has left a lot of traders scratching their heads. I think the market is generally not as confident in the so called “path to recovery” as the government and media is, and opted to take profits this morning instead of pushing higher.

What do you think? Share your comments and let me know.

Ryan