World Currency Watch: FOREX Market, FOREX Trading BLOG

Option Envy

Part I: The Easiest Way to Crossover to Currency Options Trading

By Sean Hyman Back in the day, when I first started playing options, I thought that all you had to do was “call the right direction” and you would make money on your options trade.

At the time, I was already a successful stock trader, and I just assumed I would add some leverage and quickly become a successful options trader. Easy right?

Boy was I in for a rude awakening. On my first options trade, I called the right direction and I actually LOST MONEY on the trade!

Now, how in the world can that happen?

Well, here’s how. There are actually several dynamics to an options trade and only one of those factors is “calling the right direction.”

Here’s the good news: There are couple easy steps you can take to cross the bridge to successful option trading…including learning how to call the right direction on trades.

Once you do, you can invest in not just stock, but currency options. And if you’re not interested in Forex trading…currency options trading is the next best choice for grabbing those double- or triple-digit gains off the foreign currency market.

And get this: Currency options have a longer investment timeframe. This means you can grab 200 or 300% off single currency trades…while only placing two or three currency trades in a single quarter if you wish.

But I’m getting ahead of myself. Let’s get back to the nuts and bolts of option trading so you can try it out for yourself…

There Are Several Pieces to the “Options Puzzle!”

Let’s start at the beginning. When you buy an option, you’re buying the right to either buy or sell a specific stock or currency at a specified price. To simplify things, let’s just focus on currency options for a moment.

So let’s say you buy a currency option on the British pound. You believe the British pound will rise in value over the next few months, so you buy a September call option (call just means “buy”) on the British pound.

What you’re really buying here is the time for the British pound to rise. You believe the British pound will rally soon, so you buy an options contract that expires in September. This contract gives you the right to buy the British pound at a specified price (known as the “strike price”).

This option will expire in September, but well before then, you want your option to rise in price above your strike price so you make money on the trade.

But here’s the thing: JUST because the British pound rallies doesn’t necessarily guarantee you’ll have a homerun trade here. Other factors are just as important including…

1. Time - You must call the direction right on your options trade in the right span of time or your option value will erode away even though the trade is going in your direction. It’s called time erosion.

You see, an option contract erodes away very slowly at first. The loss of value is almost unnoticeable at first. Once you start getting even remotely close to the expiration date, the option’s value starts dropping like a rock.

Why? Because it’s harder to resell that option back into the market. As your expiration date gets closer, traders have less and less time to sell the option for more than its strike price, so there’s less buying going on in the contract. In other words, fewer traders want your option as it reaches its expiration, so it’s worthless.

A Time-Sensitive Quick Fix

Options market makers have sophisticated computer models to help them to price a contract to factor this time erosion problem into their trades. But of course, as an individual trader, you don’t have such perks. So how do you remedy this?

First of all, give yourself plenty of time on any options contract. Buy your call options (or put options, aka “sell” or “short-sale” options) far out in time. In other words, don’t buy a contract that expires in 30-60 days.

Oh sure, contracts are cheap when they’re about to expire. However, they’re cheap for a reason. It does NOT mean they’re bargains! If so, the smart money (i.e., hedge fund managers and big institutions) would be bidding those options higher and they wouldn’t be cheap any longer.

However, the pros know that time erosion can work against you so fast when a contract is 30-60 days from expiring. That’s why they work furiously to avoid these long-in-the-tooth options. In fact, they’ll sell their contracts even if their option has been heading in the right direction the entire time they’ve owned it!

To remedy that, you should buy a contract that is at least a few months out from expiring on you. Some even go so far as to buy contracts even further out in time just to counteract the erosion effect as much as possible.

These contracts get more expensive, the more you go out in time…but they’re also more likely to work out in your favor too. In the end, that’s what matters.

I’ll be back tomorrow with another trick to use in your currency options trading. Until then!

Happy Trading!
Sean Hyman

Buy Currencies for Weeks, Months, Even Years

This Long-Term Profit Trigger Reveals How

By Sean Hyman Plenty of Forex traders get caught up in the daily price action in the markets. But the truth is you don’t have to trade currencies minute-by-minute, or even daily.

You can use several investment strategies to invest in currencies for weeks, months or even years. But to buy currencies for the long run, you need to know how to identify a longer-term trend in the currency markets.

So how in the world do you know how to spot the long-term trend in the Forex market? Well it’s really simple.

First, you should pull up a daily chart that goes back in time at least a year (or even longer is better).

Then place a 200-Simple Moving Average (SMA) on the chart. On the chart below, the grey line is the Simple-Moving Average (the one with the arrows). The SMA can be found under the “Studies” or Indicators” section of most any charting package.

Let the 200 Day SMA be Your Guide!

The 200 SMA is one of the most widely used indicators in the world. I even catch purely fundamental traders using the SMA in their charts. Why? Because everyone needs to know where long-term trends are heading, even pure fundamentalists.

Above, I’ve charted the EUR/USD pair on the daily chart that goes all the way back to mid-2006. That’s a HUGE chunk of time when we’re talking about currencies.

The 200 SMA Smoothes out the Trend and Points the Way to Trade!

Towards the left side of the chart, you can see that the “average” price moves upward over time. So while the price may be jagged and spiky at times, the moving average smoothes this all out so that we can tell if the overall price is headed up or down.

To the left of the chart, you can see that the price continues to climb higher. This tells you that the EUR/USD was in an uptrend at that point. In other words, the euro moved higher vs. the dollar overall.

However, on the latter part of the chart (right side), the trend turns downward and you can see the euro fell vs. the dollar overall.

You want to define the trend’s direction and trade with it because that’s where the higher probability trades lie. Low probability trades would be shorting an uptrend or buying a pair in a downtrend.

You will notice that the price tends to trade at or above the 200 SMA in an uptrend and in a downtrend the price dips below the 200 SMA and holds at or below it.

How to Tell When a New LONG-TERM Trend Is About to Begin

Therefore, we’re alerted to a “new long term trend” emerging when the price makes this shift. We can see that in August of 2008 when the price fell below the 200 SMA. At that point, the long-term uptrend ceased and the “new” downtrend emerged.

Watch for the Euro to Dominate Over the Dollar

Then in May of 2009, the uptrend re-emerged for the EUR/USD. As long as the pair can hold above this 200 SMA, then it’s still in its longer-term uptrend. Once the pair drops back below the SMA and holds below it, you’ll know that the uptrend has likely ended.

So let the 200 Daily SMA on the daily chart be your guide. You can use it to tell whether you should be looking for “long” (buying) entry opportunities or “shorting” (selling) opportunities.

Using this as your guide will enhance your trading performance. No matter how much you get tempted…don’t trade against this trend, but stick with it. Trade profits along the way if you like, but don’t bother trading against the trend.

Be patient and wait to reenter the trend once the pair retraces back towards its 200 SMA once again!

Happy Trading!
Sean Hyman, aka Professor FX

P.S. My colleague, Ashish has already recommended the perfect long-term play to take advantage of this long-term EUR/USD. Get all the details here.

Forex 101: What Counts as a Trend in Foreign Currencies?

By Sean Hyman Every once in a while, I like to go back to the basics. So today, I want to take you through the ins and outs of a currency trend.

The easiest way to talk about a currency trend is to start with what’s NOT a trend. Any currency pair that’s trading in a sideways range (sideways range means that it’s a flat horizontal line on the chart).

So if the pair you’re watching seems to be going nowhere, then it probably is in a sideways range and doesn’t count as a definable trend.

To figure out if it’s in a sideways range, look at the far left of the chart below, where the price starts and then look to the right of the chart to see where the price is now. Did it go basically from the lower left of the chart to the upper right? If so, you have an uptrend.

Did the trend line move from the upper right of the chart down to the lower left of the chart? If so, you have a downtrend. Or in other words, look at the direction of the trend line (pretty basic).

Another way to define a trend is by watching its major low and high points. An uptrend has “higher lows and higher highs.” A downtrend has “lower lows and lower highs.” So it’s just the opposite of the uptrend.

What Separates Trends in Forex…

Students and readers often ask me how to tell the difference between a long and short-term trend. Well, while this is definitely debatable…let me tell you some ways to address this.

For most traders, a long-term trend is the one that they see on a daily chart that goes back a year or so. (Remember, a daily chart means that each candle covers a full 24-hour period of trading.)

Most traders define a short-term trend by looking at an hourly chart going back 20 to 40 days. Do realize though that if someone is an “intra-day” trader, then they may only look at a 15-minute chart that stretches out over a couple of days. So it’s all really relative to the timeframes in which you trade.

Tomorrow I’ll teach you how to spot a longer-term trend brewing in the Forex market. Stay tuned!

Happy Trading!
Sean Hyman, aka Professor FX

A Summer for Currencies: Three Plays to Buy Right Now

By Eric Roseman In the absence of a major stock market decline or another financial institution blow-up this summer, it’s a safe bet to start nibbling at foreign currencies again.

For starters, we have the perfect environment for a weaker dollar. The U.S. Dollar Index (see the chart below) broke below important support levels last month. This means any dollar rally at this stage of the economic cycle should be tepid at best.

Also, the economy is stuck in a de-leveraging process that will take a few years to unwind. We also have scant bank lending and investors hoarding cash. This is not a macro environment that will boost U.S. short-term interest rates any time soon.

All Is In Place for a Lower Dollar Summer…

The United States and probably China, to some extent, desire a weak U.S. dollar to boost domestic inflation. U.S. consumer price inflation (CPI) is still contracting. In May, CPI declined for the third straight month to its lowest level since 1955. A lower dollar helps to grow inflation – a desperate commodity right now.

On Friday, China launched another currency salvo claiming the world should look “for alternatives to the U.S. dollar.” Such utterances won’t boost the buck but instead likely help facilitate a decline. Interesting how China would slam the dollar when she holds about 35% of all Treasury bonds in circulation.

(Of course, over the weekend, China did an about-face when Bank of China Governor Zhou Xiaochuan said, “our foreign exchange reserve policy is always quite stable,” which calmed speculation about the dollar for the moment. But I still see China wanting a weaker dollar going forward.)

Three Plays I’m Starting to Nibble At Now

On Tuesday, I began buying small positions for my managed accounts in Canadian dollars and Norwegian kroner. Gold remains 5% of my portfolio for now.

Though I remain cautious about commodities this summer, including oil and gold, I like the Canadian dollar and the Norwegian kroner because both currencies have relatively stronger balance sheets.

Norway, in particular, boasts a 10.5% budget surplus-to-GDP ratio – the highest among industrialized nations. This compares to rapidly rising or skyrocketing budget deficits across the major economies since late 2007. And Canada, though now in budget deficit, sports a small deficit compared to its overall economy.

What about the euro? The single European currency is probably better than the dollar but not by much. I prefer gold, NOK and CAD.

Several peripheral Eurozone economies are now in deflation and major trading partners to the East are in desperate need of bank capital. I’m still predicting some sort of blow-up in the Baltic Republics or the Balkans this year. Any macroeconomic collapse in these regions will hit the euro and the emerging markets new “bubble” hard.

The precious metals should rally if the dollar continues to weaken. But, like I said earlier, I’m just “nibbling” at foreign currencies here to build fresh positions that are part of a long-term accumulation strategy for my dollar-based accounts.

Any sell-off in risk-based assets this summer – highly likely ahead of earnings guidance and a 40% post-March rally – will drive the dollar higher.

That’s when I’ll add to my existing foreign currency holdings.

Another Exciting Summer Especially With China Involved

Gold and silver, however, remains hostage to traditional summer weakness in the commodities complex; gold is especially vulnerable near-term because jewelry demand has collapsed and any outflows from gold-related ETFs will drive the price sharply lower. I’m looking to re-enter gold around $875 to $850 and silver around $14.

It strikes me as fascinating that China is denouncing the dollar again. Something is cooking in Beijing and Washington. I’m thinking policymakers will probably welcome a weaker dollar.
This should be another very exciting summer marked by renewed volatility, especially in the currency markets, which have been largely range-bound for the last four weeks.

Best Regards,
Eric Roseman, Editor
Commodity Trend Alert

EDITOR’S NOTE: For 20 years, seasoned investment veteran Eric Roseman has been recommending the most contrarian investment plays at packed investment conferences, to hundreds of thousands of daily readers, and at his own asset management firm in Montreal. Six years ago, he launched his own commodity investment research service, Commodity Trend Alert. Ever since, he’s helped regular investors grab profits as high as 70%, 124%, 131% and 274% playing gold, silver, energy, agricultural commodities…and yes, even currencies. Get more details on his latest Commodity Trend Alert play here.

The Swiss Cried Uncle Again

(Anyone Paying Attention Made a Killing!)

By Sean Hyman On Tuesday, I told you that I believed the Swiss would soon intervene in their currency once again.

Well, lo and behold, it happened the very next day. And the EUR/CHF (euro/Swiss franc) soared just as I said it would.

As a Forex trader, I had my entry order in for the EUR/CHF already on Tuesday. (For those of you who are new to Forex, an entry order is a special type of trade that instructs your FX dealer to only buy or sell a currency pair if it reaches a specific level. It ONLY lets you “enter” a trade at the price level you want, hence the name “entry order.” If the currency pair never reaches that level, then you don’t get filled on that trade.)

In short, I was ready to go whenever the Swiss National Bank decided to intervene. I woke up the next morning and I was filled on the order and was up over 260 pips! That’s huge for a pair that typically moves about 80 pips in any given 24-hour period!

Check out what the intervention looks like on the 5-minute chart below.

The Swiss Completely Obliterate the Short-Sellers!

You can see why it’s important even for technical traders to pay attention to the central bank comments. When central bankers speak, they’re usually not bluffing – especially central bankers outside the U.S.

Central bankers around the world will usually send out some warning signals to the markets before they act. For instance, they can express their disgust for where the currency is, like the Swiss did. And if Forex traders don’t pay attention, Central Bankers will soon put them in the “House of Pain.”

In this case, anyone short-selling the EUR/CHF got killed this week! They lost 260 pips overnight. That’s huge!

Of course, I was long the EUR/CHF because I anticipated the intervention. So I’m loving the Swiss National Bank this week!

Okay, let’s talk about what’s coming next. It appears that the Swiss have successfully reversed the downtrend in the EUR/CHF pair. This will cause them to gain support from the big hedge funds and their “trend following systems.” That’s one reason why the Swiss sold francs furiously yesterday, to ensure they got above the downtrend line on the daily, 1-year chart.

This is a monumental moment for the Swiss! Now, if this trend reversal sticks…it will bode much better for their economy going forward.

Until next time….

Have a great weekend!
Sean Hyman, aka Professor FX

P.S. One of your fellow FX University readers wrote me today to say she made a 300-pip profit on my EUR/CHF recommendation. That’s great! Congrats! If anyone else has comments or questions for me, you can email me at info@worldcurencywatch.com.

Related articles:

Swiss Cry “Uncle!”

An Act of Desperation for the Swiss

How to Choose a Profit Target for Your Next Forex Trade

The 500% Difference

By Sean Hyman Strange but true…

Many Forex traders – even professional Forex traders – don’t trade exotic currencies.

There are several reasons why. Some traders simply don’t understand the profit potential of trading exotic currencies from smaller emerging market countries.

Emerging Market or “Exotic Currency” World…

Some traders like to stick to currencies they know. So if they’ve been tracking the euro or yen for the last 10 years, they’re not willing to switch over to another batch of currencies from smaller, more out-of-the-way countries.

But let me be the first to say…they don’t know what they’re missing. As I’ve written here in FX University in the past, the single most profitable trade of my entire Forex career was an exotic currency trade.

In fact, the truth is if you catch a trend in exotic currencies, these exotic currencies can regularly hand out as much as five times more profits (or 500% more!) than regular major currencies.

Reason: There are key differences between exotic currencies and regular majors that give them much more profit potential.

Just take a look at the charts below. I’ve included a chart of a traditional exotic currency, the South African rand (USD/ZAR), and a chart from the oldest major currency in the world, the British pound (GBP/USD). While the squiggly lines on the chart appear the same, there are several important differences that we need to talk about.

South African Rand Makes Leaps…

…While the British Pound Strolls

The Strange But VERY Profitable Difference

The first thing traders notice about exotics is how many pips these amazing currencies can move on any given day.

The top chart shows that the South African rand has an average daily range (ATR indicator) of 1,000 pips a DAY during a normal trading year. Last year, during the credit crisis, the South African rand was moving over 7,000 pips in a day!

During the same timeframe, the British pound varied from moving 150 pips a day to 550 pips a day at the height of the credit crisis.

So the actual number of pips these currencies move per day is far more in the exotic pairs than the majors…even volatile majors like the British pound.

Note: The reason for so much volatility is exotic currencies traditionally have thinner volumes than the majors. As such, news events move these exotic currencies more than the major currencies.

Also, when you’re watching exotic currencies, you’ll notice that these currencies tend to have a bit more erratic behavior. That’s because traders in exotic currencies tend to dive in and out faster. In other words, Forex traders want the higher yields and pip movements that only exotic currencies can offer. However, if traders sense trouble, they are quick to bailout of their positions.

Exotics Actually Present LESS Risk to Your Account on a Pip-to-Pip Basis

Some currency investors are drawn to exotics because of that very volatility, while others shy way from them for that very reason. However, when it comes to exotics, the payout in dollars in these currencies varies significantly from their pip value.

For instance, when you buy a major currency pair like the euro (EUR/USD) or British pound (GBP/USD), you usually risk about a $1 every time your pair moves a single pip in a mini-account. You also earn about $1 a pip every time it moves in your favor.

You Risk Less In Dollar Terms With Exotics…

However, many exotics only pay out about 12 to 63 cents per pip of movement on average. So how many dollars you’re actually winning or losing per pip is vastly different than a major. Most traders don’t acknowledge that.

Therefore, your actual dollar risk is “toned down” more than you think when you play exotics. Especially considering you’re only risking 10-60% of a pip compared to a major currency pair (in dollar terms).

So if you were trading the South African rand, you would have to trade about eight times the typical number of mini-lots in order to equal 1 mini-lot of the typical British pound (GBP/USD) trade.

In the case of the Turkish lira, I’d have to trade about twice as many lots as I did for the GBP/USD to be about the same risk dollar wise.

False Argument Against Exotics: The Spread Is Too wide! Wrong!

Another huge difference at first glance is the pip spread difference between the major currency pairs and the exotics.

And yes, there is a big difference in pips.

The spreads on exotics may be between 50 – 200 pips vs. majors being 2-5 pips for instance. However, when you convert those “exotic pips” into dollars, you’ll find that the cost is about $24-$31. Yes, that’s more than the majors BUT it’s not nearly as much as it sounds when we were talking about the number of pips that it cost per trade.

Now some argue that they wouldn’t trade an exotic pair due to that cost difference because a major pair would be $2 to $5. However, again, they’re not considering how volatile, and how potentially profitable exotic pairs can be.

Many of these exotic pairs can move 500 to 3,000 pips in a day. So just like you can cover the 2-5-spread cost in a major currency pair that moves 180 to 250 pips in a day, you can do the same thing with an exotic pair. Any currency pair that moves 500 to 3,000 pips in a day can easily erase its 50-200 pip spread cost.

The point being…an exotic pair with a high pip spread is also volatile enough to cover that spread cost and then some. In fact, an exotic currency can quickly cover its cost just as fast as the lower volatile majors cover their spreads.

So exotics have higher volatility, higher spreads, YET the pip cost is lower. That helps lower the dollar amount of the spread.

Another bonus: The daily interest earned on these pairs is generally significantly higher. So if you call the direction right and earn significantly more interest along the way, it does help to compensate for any added risk.

Fundamentals Aside, You Need to Watch Investor Sentiment!

One final difference in exotics over the majors is the ability to get fundamental data on the currency. Oh yeah, you can get it from their central bank’s site. And you can get some info from Bloomberg, etc.

But other than that…it’s sometimes hard to gain all of the fundamental data that you can readily get from a major industrialized country.

However, with that said, the main, big overriding factor with exotics is usually how risky investors are willing to be. When economies are recovering or in a boom, exotic currencies tend to push higher (pushing the USD/ZAR, USD/TRY, etc. downward as the foreign currency rises up against the dollar).

But, when “times are tough” around the world and investors get cautious, the exotics are some of the first ones they run from (which gives a great tradable opportunity too as these pairs shoot up as they run to the dollar).

So in either case, exotics can be a great trade. Indeed, they can be five times more profitable than majors. Right now, may be the best time to trade them…as economies are pulling out of a recession and stock markets are showing signs of recovery again.

Happy Trading!
Sean Hyman, aka Professor FX

P.S. BIG NEWS: Our Exotic FX Alert – that regularly averages as much as 230% winners – is finally open to new traders. Get all the details here.

A Tipping Point for Russia

By Sean Hyman I love sitting back and watching exotic currencies when they near a tipping point. By that, I mean that they could easily (and quickly) go either way, depending upon how investors perceive the global economy in the near-term.

So what’s going on? Russia’s Micex stock index has now dropped just over 20% from its 2009 highs, which technically puts it back into bear market territory.

If this trend continues, it could really scare investors back out of Russia…its stocks…and of course, its ruble! In fact, you can see this story already starting to play out on the chart below…

The Ruble Nears Another “Tipping Point”

If the scare continues on, then the USD/RUB pair will bounce back upward off of that green uptrend line as traders sell rubles and buy dollars.

On the other hand, if the pair traded down into the bottom circled area, below the uptrend line…then it means that investors are willing to stick it out and hold onto their rubles for the time being.

But honestly, I just don’t see that happening. The 22% drop since its June 1st peak has been swift. It’s scaring the pants off of many investors right now. That’s what makes this ruble story so interesting.

You see, formerly this Russian index of 30 companies roared upward 135% since last October and that caused the USD/RUB pair to dive. However, if this downdraft continues onward, then rubles will be sold, as investors flee Russia for greener pastures in other currencies abroad. The first stop out of Russia’s ruble will most certainly be the U.S. dollar.

It turns out that my colleague Ashish Advani agrees with me. He posted his own bearish views on the ruble on his blog this morning. Let’s listen in…

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Why the Ruble Is Heading South…

The recent drop of over 20% on the Russian stock market has me thinking about Russia and what’s coming next for Russia in the coming months and quarters…

The Russian Central Bank has been trying to help with the liquidity crises. They’ve been slashing interest rates in a big way. Of course, that’s also caused the ruble to drop dramatically in value.

The recent economic data suggests some tough times ahead for Russia (even with oil climbing higher!) Andrei Klepach, Russia’s deputy minister of economic development, just announced that real GDP contracted by 11% year-over-year (YOY) in May. Real GDP also contracted by 10.2% YOY over the first five months of this year.

That’s not all. It’s expected that Russia’s second quarter GDP number will decline about 8%. For the whole year 2009, economists are saying GDP could contract by 6-8% year-over-year. Meanwhile the IMF has forecast the drop to be around the 6% mark. All of this seems to clearly indicate that the recession is deepening in Russia.

Let’s see what other indications we can get on the economy:

1. Industrial output fell by 17.1% YOY in May. Output also dropped by 16.9% YOY in April, and 15% over the first four months of this year.
2. Retail sales dropped by 5.6% YOY in May, after falling 4.5% YOY in April, and after falling around 1.4% YOY over the first four months of the year.
3. The only silver lining on the horizon is that unemployment rate eased back to 9.9% in May, from 10.1% the month earlier.
4. The trade deficit has slowed down to $9.8 billion in May. For the first five months of 2009 this put the trade surplus at $36.3 billion. It stood at S$83.3 billion one year earlier. Exports were lower by 47% YOY over the first five months of the year, with imports down by 40% YOY.

The combination of the weak real economy outlook, plus the dramatically lower trade surplus suggests a coming weakness for the ruble.

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Thanks Ashish! Okay, back to me…

Here’s Why I’m Watching the Ruble Right Now

I bring the focus to the ruble because of the BRIC nations that have rebounded so well…Brazil has only fallen about 8% off of its 2009 peak. India has dropped about 7% and China is roaring on and is at its higher levels for 2009.

So Russia’s currency would be the first to “feel the pain” if investors panic and head for the hills.

Keep an eye out on this one to see what traders and investors alike do with the ruble from this point. Get out your popcorn, folks…it should be interesting.

Happy Trading!
Sean Hyman, aka Professor FX

P.S. If you haven’t checked it out yet, I urge you to visit Ashish Advani’s new blog. He’s answering reader questions, uploading FREE trading videos, and he just finished his latest letter to all his readers. You can view it all here FREE right now.

Related Articles:

Ruble Woes Will Continue Right Through 2009

Four Exotic Currencies To Own

The Dollar Survived the BRIC Meeting

Let’s Talk Turkey

By Ashish Advani For years, Turkey has been an odd in-between country – traditionally the bridge between Europe and Asia for trading, traveling, etc. The Turkish lira itself has been an interesting currency play for Forex traders in the past.

But of course, that all changed with the global recession. Like most emerging market nations, the Turkish economy has been struggling ever since. That’s leading many Forex traders to wonder if the Turkish lira is even worth trading anymore.

However, I’m starting to see some signs of promise in the Turkish economy. In fact, I’m cautiously bullish on the Turkish lira at this point. I believe this area of the world holds significant possibilities and the Turkish lira is just one of several currencies that look to benefit.

Why do I say that? Well, first of all, Turkey seems to be weathering the storm reasonably well. The country may actually come out stronger at the other end of this recession.

At this point, everyone has already accepted that the global credit crunch fallout has hit Turkey rather significantly. Indeed, the economy is expected to decline by 4-5% in 2009, which is higher than previously estimated (2% by the World Bank).

But still I see some promise hiding there. Right now, exports are down but so are imports. In other words, they’re not selling as much, but they’re not buying either. That gives Turkey a subtle edge.

Specifically, the reduction in oil prices from $100 a barrel down to $60 has put a huge dent in their imports. In fact, Turkey will save $16 billion in the import bill for 2009 just because of cheaper oil.

Turkey Uses the Recession to Pay Off Their Debts

Lower exports and imports are critical to improving Turkey’s balance of payments and trade deficit.

From its peak of a deficit of $49 billion back in August 2008 the deficit has plummeted to around $27 billion in April 2009. This lower deficit has helped the country roll over its debt obligations as they come due.

Given its neighbors in the region, Turkey seems to have created a great track record for easily refinancing its debt. Just the fact that Turkey can refinance debt has been a huge confidence booster for the country.

The lower trade deficit has also helped reduce pressure on the foreign exchange rate. That’s kept the Turkish Lira rather stable since the initial decline back in August - November period. (Recall, the dollar was on a rampage during that time period, and all currencies declined against the dollar worldwide with or without merit.)

It Does NOT Look Like Turkey Will Accept Handouts This Summer

The recent debate in the country has been around the on-going discussion that Turkey is having with the IMF (International monetary Fund). There is a heated debate on whether Turkey should accept new FCL (Flexible Credit Line) facility from the IMF.

Of course, the IMF won’t offer a flexible credit line without strings attached. If Turkey accepted, there would be regular stringent reviews of the line of credit. That could hamper Turkey’s growth and flexibility in the future.

However, right now it’s so easy to rollover Turkey’s external debt liability that officials are debating whether the benefits of such a new line are really worth it. The May 2008 facility is still working and there seems to be no rush for the country to enter into a new facility.

A Central Bank In Control…

Finally, I’m looking at Turkey because of the country’s prudent central bank.

The Turkish central bank seems to be very comfortable with inflation in the country as well as the current FX prices in the market.

Unlike some other central banks around the world, the central bank has some room to breathe. They have several inflation-fighting arrows left in their quiver including regular U.S. dollar auctions. They can also directly intervene in the market if necessary.

So I doubt the central bank will do anything to weaken the Turkish lira anytime soon.

All things considered, I am cautiously optimistic on Turkey’s economy. I expect the country to come out of this recession much stronger than what the current situation is. I’m also bullish on the Turkish lira. I expect the lira to strengthen somewhat slowly but steadily in the coming months at least till October of this year.

In October, the IMF will hold its annual general meeting in Turkey and may sign the new FCL around then. And depending on which side wins the agreement terms, we can continue to build our views on Turkey, or reverse course then.

Yours in FX Profits,
Ashish Advani

P.S. I just posted my second video on my new “Big-Game Hunting” blog! In this video, I’m giving you an insider’s glimpse at a couple of actual exotic trades in the Forex market…including why I chose them, the thinking behind my stop-losses, how I dealt with the market uncertainty while in these trades…everything. This video is yours to enjoy FREE with my compliments. Click here to watch now.

The New “Recovery Currency”

By Ashish Advani As an exotic Forex trader, I’m constantly searching the globe for opportunities in the world’s smallest, most overlooked economies.

It’s my job to find these countries and identify their trends so I can either buy or short their currencies in the Forex market. These emerging market or “exotic” currencies tend to have less volume, so their currencies have the potential to move a lot faster than your normal major currencies.

Frankly, I don’t care if these smaller currencies are rising or falling. I can make money either way as long as I can find a sustained trend.

So where can you find sustained exotic trends right now?

As you probably know, most exotic currencies sank right along with the majors for the better part of the last year. In fact, some of my fellow Forex traders made a killing just going long the dollar versus most exotic currencies.

However, that looks like it’s all about to change. The “strong dollar story” has already started to fall apart since March. And it looks like the dollar is going to continue to weaken overall for at least several months.

The easiest way to play the falling dollar is to buy the exotic currency that looks to recover first from this global recession.

Here’s the good news: I’m starting to see major signs of recovery for a few specific exotic currencies – including the Brazilian real.

$661 Million Flowed Into Brazil in Just the Last Two Weeks

So why Brazil?

For starters, let’s look at Brazil’s cashflows. The Central Bank of Brazil (BACEN) just reported net FX flows into Brazil through June 12. The figures show that net FX inflows declined to $110.9 million in the second week of June, from $550 million in the first week.

Now this may not sound like good news. But if you take a step back you’ll see a very different picture…

In the first half of June, commercial surplus was driving the net FX flows. That surplus actually amounted to $866 million, which was four times larger than the net financial outflow right now (or $205 million).

On top of that, the net inflow of $661 million in the first half of June 2009 was better than the net outflow of $143 million a year ago.

In other words, more money is flowing into the country this year than in June of 2008. This means Forex traders around the world are starting to recognize the promise coming out of Latin America’s largest economy.

More capital flowing into Brazil is VERY good news for the Brazilian real going forward.

China – Brazil’s Quiet Benefactor

As you’ve heard Chuck say here in FX University many times, China looks like it’s going to be the first country out of this global recession. Indeed, China is one of the few countries where I’m seeing true signs of “green shoots” right now.

And fortunately for Brazil, as China recovers, it has been buying up goods from countries around the world. China started ordering more goods from Brazil in February of this year. Ever since, Brazil’s economy has been improving.

In fact, in my opinion, China is the biggest contributor to Brazil’s recent increase in cashflow this month. Specifically, China is buying Brazil’s iron ore, airplanes, and even raw materials and agricultural products.

In short, Brazil is benefiting from China’s growth. And this is only the beginning. In the months to come, I see China buying even more of Brazil’s goods.

On top of that, Brazil also boasts a very wise central bank that has behaved prudently for the most part. With a strong central bank at the helm to control inflation and manage these cashflows, I expect great growth stories to come out of Brazil in the next few quarters.

This all will lead to significant strengthening of the Brazilian real.

How to Buy Into Brazil’s Strength

This Brazilian real story should continue to play out for several months, as the dollar continues to sink.

Indeed, that’s why I recently recommended our Currency Capitalist readers buy into Brazil’s strength with a long-term play that offers 6.5% APY interest. This long-term currency play also lets you invest in the Brazilian real indefinitely tax-free, until you’re ready to collect on your investment. Members, please check your recent issue for full details, if you haven’t already.

However, there is another strategy you can use to buy the Brazilian real for the long run. If you’re just looking for a quick and easy way to buy the real this afternoon, you can buy the WisdomTree Brazilian Real ETF (NYSE: BZF) right through your normal stock brokerage account.

There is very little on the horizon that will put a dent in Brazil’s growth story. Even if the Chinese growth story stalls a little and the Brazilian orders slow down a bit, the long-term growth prospects in Brazil are tremendously strong.

Bottom line: stay long Brazilian real and short U.S. dollar.

Yours in FX Profits,
Ashish Advani

Related Stories:

Green Shoots “Made in China”

Good News: Everything Is in Place for the Real to Rally

Could This Be the First Country to Emerge from the Recession?

Crush the Forex Learning Curve

By Sean Hyman When you’re new to Forex, you should definitely keep your charts simple. That way, as I tell my Forex students, you can’t mess up as easily. Plus, you want to use the simplest, most straightforward charting techniques possible.

You see, a lot of Forex trading (especially in the short-term), involves looking at a chart and noticing trend patterns in specific currencies. Once you notice these trends, you can draw trend lines, look at support/resistance lines, etc. But that all takes a little getting used to if you’re still a beginner.

So let’s start at the beginning. There’s one “indispensable indicator” you need to learn about first. I like it because it’s dummy proof! Once you set it up, it’s plotted on the chart automatically and most importantly, correctly.

What is it? It’s the Simple Moving Average (SMA), particularly the 50-day Simple Moving Average. It’s just like a simple moving average for stocks. It just tracks the average moving price for the currency pair over the last 50 days.

So why is the 50 Simple Moving Average so important? Because it’s a good medium term trend indicator. It tells you where a currency is headed in the next few weeks. See the GBP/USD hourly chart below and you’ll see what I mean.

Trade in the Direction of the Moving Average and Gain an Edge!

Here’s how you can use the SMA 50: The SMA 50 is a good indicator to know when to either buy or sell a pair. Let’s start with the buy signal. On a British pound chart above, the gray line indicates the SMA 50. As a Forex trader, you want to buy when the trend line (the blue and red line) is above the upward sloping SMA 50 (the grey line), but it’s also nearing the point where it’s touching the SMA 50 line.

On the chart above, you can see that there are three areas where the SMA 50 indicated a potential entry points. I circled them in green.

You can see from the chart above that if you bought when the price was above the upward sloping average but was near the average (green circles), then you had a high probability of picking a winning trade. The SMA 50 indicated three separate entry points because the line provided a “region” of support for the pair.

As I said, you can also use the SMA 50 to know when to short a pair. Start by looking for when the trend line drops below the SMA 50. You also want to see where the SMA 50 slope turns downward. You can initiate your sell order (short) when the pair is close to the average but also below it. I circled these sell points in red on the chart above.

Now, in order to provide extra confirmation and a few more trading opportunities, you can add in my second “indispensible indicator,” the Slow Stochastic (14,3,3 settings). See the chart below.

Combine the Stochastic and Moving Average to get an
Even More Accurate Buy and Sell Signals!

Here’s how to use the Slow Stochastic: First of all, the Slow Stochastic is indicated on the lower half of Forex charts. It’s indicated by the blue and red wavy lines at the bottom of this chart above. You want to catch the trend when it’s either on its way up or down, so you’re always looking for where the Slow Stochastic is changing direction.

As you will notice, the Slow Stochastic follows a similar path to the SMA 50, so you can use both to figure out when your particular currency is about to move in your favor.

A stochastic buy comes when the two lines go down and cross and then turn back upward. A sell signal comes when the two lines rise, cross and then turn back downward. The stochastic gives overbought/oversold indications. But you must ONLY take the entry signal that is with the trend direction and not against it, if you want to have an edge.

Two Indicators = Two Separate Chances to Pick Your Next Winners

The moving average tells you which way the trend is going by pointing the way and by providing its own areas of support/resistance along the way.

Then you can fine-tune your entries by using the Slow Stochastic.

The moving average will ensure you’re calling the trend direction correctly even before you know how to draw trend lines correctly. It will also constantly remind you on the chart to ONLY trade in the direction that it’s pointing. In other words, NO Counter Trend Trades, Ever!

Use this combination of indicators and watch your trading start to improve, almost immediately!

Remember, if the pair isn’t trading fairly close to the moving average, then just move on to another chart where this is the case. Most trading stations will have 20+ pairs to choose from, so you ought to always have something to trade.

Until next time….

Have a great weekend!
Sean Hyman, Professor FX

P.S. My colleague Ashish just started his new Forex blog, where he’s posting FREE videos on how to choose your next winning Forex trades. In his first video, he’s explaining how regular Forex traders like you and me made 232,000 on 29 small trades. Trust me – you don’t want to miss this. Click here to watch it now.