Interest Rates and the NFP – What to Expect This Week?

The US dollar is in a free fall lately as sellers emerge on every spike higher. Despite the fact that the Fed is the only major central bank raising rates, nobody wants the dollar. Not even for a safe-haven status.

When investors look for shelter, they buy safe assets. Typically, in the Forex market, these are the JPY and the CHF currencies. But also the US dollar.

Not this time. It turned out this summer it was the Euro’s turn to squeeze. And, it did that in quite a fashion.

While the EURGBP cross pair moved almost vertical for the last four months, the EURUSD did the same. But what would be the reason for the EURUSD to move so aggressively against the dollar?

For sure, not the interest rate differential.

interest rates

Interest Rates in Eurozone and the United States

A quick comparison between the two leaves us with a huge interest rate differential. Favorable to the USD. Yet, it is sold across the board.

Being long on the EURUSD pair this summer paid the price. Even if the pair is one of the most expensive ones to keep over night. Because of the interest rate differential in favor of the dollar, the EURUSD longs have to pay a negative swap.

Effectively, at the end of each trading day, brokers deduct a small amount from EURUSD longs trading accounts. But it didn’t matter as the EURUSD pair overly compensated with such a strong bullish move.

However, the interest rate in the Eurozone is negative. Yet, investors favor the European currency instead of the USD.

On the other hand, in the United States, the Fed hiked the rates multiple times. Only this year, it did so twice.

While not much, the federal funds level sits at a solid 1.25%. And, the expectations are for the interest rate to rise still.

Friday’s NFP in Focus

With the recent decline over the summer, the USD is in the longest losing streak in the last fourteen years. That’s quite something considering the interest rate differential with other currencies.

The NFP this Friday has the potential to be a game changer. It may open the gates for the next rate hike in the Fed funds rate.

A solid print, however, is not something new. The strength in the US jobs market is evident for quite some time now. Unemployment rate keeps falling.

It must be accompanied by a rise in inflation. Then and only then, market participants will favor the dollar.

Because the Fed has a dual mandate, it looks at both inflation and jobs creation before hiking the rates. But those shorting the dollar must not forget the Fed is in the middle of a tightening cycle. It means the interest rate differential will rise. Eventually, traders will give up in search of the ever higher yields.

Conclusion

The market moves based on the fundamental and technical analysis. And, on supply and demand imbalances. But the Forex market is so liquid, that only when big players, or when macro economic dynamics change, the market will change.

Until then, it may still remain irrational. When this happens, usually retail traders get stopped. Almost all of them.

High-Frequency Trading in Forex

High-Frequency Trading or HFT refers to automated machines (supercomputers) that buy/sell thousands of trades per second. The idea is to profit from even the smallest market move.

The industry exploded lately. It is dominated by big players that invested massively in computers able to automatically execute trades as fast as possible.

Why do retail traders care? Well, the Forex trading environment changed for a fact.

Patterns do not look anymore as they did before. And with technological advances, the trading arena will change still in the years to come.

high-frequency trading

Fundamental Analysis and HFT

These supercomputers buy and sell a currency pair mostly based on fundamental inputs. Quant firms use complicated math algorithms to buy and sell currencies on news releases.

The economic calendar helps. Everyone knows the news ahead.

It includes the previous data and the forecasted one. And, on top of it, the way a currency should react.

For a programmer, these inputs are enough to instruct a trading algorithm to buy or sell. And when they do that, they beat any retail trader due to:
– higher execution speed
– bigger volume

Now you have an explanation as to why the Forex market makes sudden moves. Why, when the news gets out, the market makes huge spikes in a blink of an eye?

The answer comes from HFT and automated trading. While humans cannot buy or sell a security at the same time, computers can. Hence, all trading algorithms are instructed to buy or sell a currency based on the same inputs.

As such, the supply and demand balance changes. So, even the most liquid market in the world, the Forex market, gets to move when the volume increases.

Technical Analysis and HFT

As for the technical analysis, HFT’s fast execution changes influences patterns. These days it is hard for a market to form a double or triple top.

Such classic patterns have clear rules, but those rules won’t work today. A top may be an area, rather than a level. And, the examples can continue.

Even trading theories changed. The Elliott Waves Theory is made of patterns that appear on various cycles. Cycles of different degrees.

But it is also strongly depended on Fibonacci levels. However, at the time it was developed, in the 1940’s, the Fibonacci numbers were applied from the end of the move.

Yet, today, the end of a move differs. Only a few years ago the EURUSD pair had three pips spread. Nowadays, the spread is 0.02 or even less for some brokers.

This changed the end of a pattern. Or, the end of a candle. Almost three pips difference may mean a lot for a trader that has a ten pips target. That’s thirty percent!

Conclusion

Statistically, over eighty percent of the trades are executed automatically. Traders place stop loss orders and take profit ones, pending order to enter/exit a market, etc.

On top of that, HFT trades with fabulous speeds. If the retail trader calculates a pip as the fourth decimal in the EURUSD pair, the HFT robots trade for the ninth or even tenth one. Sometimes, even more.

Unfortunately, this spells trouble for the retail trader. The trading game is not fair.

However, it doesn’t mean that retail traders cannot make it in this market. It only means that the gap, instead of closing, is getting larger by the day.

Why is Forex Trading Difficult But Profitable?

Why Is Forex Trading Difficutl

Forex trading involves buying or selling a currency pair to make a profit from its movement. But, why do currency pairs move in the first place?

Except they’re in a monetary union, like the Eurozone, every country has a currency of its own. The US dollar in the United States, the Canadian dollar in Canada, the Pound in the United Kingdom, and so on.

A currency reflects the shape of that respective economy. A stronger economy has a stronger currency.

The Forex dashboard comprises different currency pairs. Or, pairs two currencies with one another.

They reflect the differences between the two economies. As such, they move a lot.

This is what matters for Forex traders. When the currency pairs move, there’s scope for some profit to be made. Or, a loss.

Why is Forex Trading Difficult?

Forex is the most difficult financial market in the world. If you make it here, you can make it in any other market.

Other markets have their technicalities, specific conditions, and so on. In some cases, they are even limited.

Not the Forex market. Over five trillion dollars change hands every day in this market.

This is both a blessing and a curse. Blessing, because traders can virtually sell or buy unlimited amounts.

Do you want to dump a hundred lots of a currency pair? Not a problem in the Forex market.

Liquidity is there. But, with liquidity, comes risk.

Prices change in a blink of an eye. On no new, no nothing. Simply, they stretch for some stops.

The players in the Forex market make it very difficult for traders to succeed. Central banks, Forex brokers, liquidity providers…all have an interest in this market.

Some apply the monetary policy, like is the case with central banks. Others, simply trade in the opposite direction of their clients, like some Forex brokers.

But, the most important factor comes from the algo-driven conditions in the Forex market. High-frequency trading, or algo-trading, is king here.

Why is Forex Trading Profitable?

Retail traders didn’t have access to the interbank market until relatively soon. A decade ago or so, technological advances allowed for brokers to target retail traders.

As such, every trader’s dream of financial independence come closer to reality. Not that everyone wins.

But, at least the idea that one can make it on the financial markets attracts people. And, some do make it.

With knowledge and a disciplined approach, trading is profitable. It may be the most time-consuming and full of stress job on earth, but it is worth it.

Fortunes can be made virtually overnight. That is, in a shorter period than working a regular day job.

But, careless traders can lose too. Unfortunately, retail traders fall into the second category most of the times.

Conclusion

Even though conditions are against retail traders, the fact that now they can access the interbank market at a very low cost offers an amazing opportunity. One that didn’t exist some time ago.

As such, the possibility is there. Hence, only the idea that huge profits can be made, attracts and will still attract people to Forex trading. No matter how hard it is to make it in this industry!

Who Makes it in Forex Trading – Part 2

In the previous part of this topic, we highlighted some of the players in the Forex market. Moreover, we showed how they make a profit.

We brought arguments that some Forex brokers profit when take the other side of their clients’ trades. Statistically, they stand more chances making a profit like this.

And then, there’s the central banking. Special trading departments manage to make huge profits. However, not all relate to the Forex market. Nevertheless, central banks do profit from the way the currencies move.

But, the list is far from over. Here are few other entities that make it in the Forex world.

High-Frequency Trading Firms

Today, traders follow robots. You must have noticed the sudden spikes in price action when a news is released.

There is no human trading responsible for such a spike. I mean, that’s not possible in the Forex market. This market is so huge that no one entity can cause spikes like this.

Robots can. Robots, or trading algorithms, are, in fact, super-computers. They’re programmed to buy and sell thousands of positions per second. Thousands!

Maybe even more.

To put this into perspective, retail traders use a five-digit account these days. It effectively means that after the decimal, five numbers follow.

A pip represents the changing number on the fourth decimal. Well, trading algorithms go for the 9th one.

These trading algorithms are the pillar of the so-called high-frequency trading companies. HFT trading is also known as quant trading.

That is because the trading algorithms buy and sell based on complicated mathematical formulas. Or, quant math.

Math experts are paid big money by quant firms to join and develop powerful trading algorithms. As such, these firms stand better chances to profit from the market swings.

If anything, we know for sure they create those swings.

All in all, the HFT industry is a huge one, with billions of dollars turnover on a yearly basis. However, they’re not after big profits. But, after compounding ones. Their regular profit outcome is in the low single digit area.

Some Retail Traders

Some retail traders make it. There’s a saying in trading. There’s nothing wrong in losing your capital or meeting a margin call. If it happens when you’re young.

Because chances are you won’t have enough capital to lose by making stupid mistakes. All retail traders that eventually make it, lost money at first. All of them.

But, somehow, they found a way to solve the trading riddle. Money management and discipline, a good strategy. They learn Forex trading from more experienced traders.

They follow rules and strategies taught by others. And, most of all, they don’t treat trading as a hobby.

When this happens, chances to survive and to make it in this business increase.

Believe it or not, Forex brokers know in advance (or, at least, they have a pretty good idea), who’s going to make it or not. The preliminary questions asked prior to the opening of a trading account are designed in such a way to filter the traders that will be treated from a market making point of view, from the ones that will be treated from a true brokerage firm point of view.

Conclusion

To sum up, trading is not for everyone. Moreover, Forex trading is not for most of the retail traders. If you don’t have the time and dedication to it, not to mention patience and willingness to learn, you won’t make it.

Just look at the other traders you face in the Forex arena. What makes you think you can beat their odds to win?

Who Makes Money in Forex Trading – Part 1

This is one of the most important questions to ask. Who makes money in Forex trading. What is for sure, retail traders don’t. This two-part article aims to answer this question as accurately as possible.

At least, not from the start. Statistically, most of them fail. Almost all of them.

Over ninety percent of Forex retail traders lose their deposit in the first six months. There are plenty of reasons for that.

Firstly, they come to the trading arena having unrealistic expectations. They want to make a million bucks starting with one thousand. And, they want to do it overnight.

Secondly, they don’t know what they’re doing. They’re not educated. As such, they treat Forex trading as a hobby. We all know having a hobby is expensive…

Finally, instead of learning from their pitfalls, they put more money into the trading game. However, this is not a game. This is the cruelest arena in the world. No one feels sorry when winning. So, no one should feel bad when losing. After all, everyone knows the risk. Right?

But then, who makes money in Forex?

Who Makes a Profit?

The Forex market is the most liquid market in the world. The daily turnover is in trillions of dollars.

Because the way our financial system works, everything is related. And, integrated.

A currency pair moves for various reasons. Some currency pairs free-float. It means they move based on the imbalances between supply and demand. Some are controlled.

Despite all difficulties, some parties do make money. How come? And, how much?

Forex Brokers

To be fair, I’m referring here only on some brokers. The point of this article is not to consider brokers’ commissions and other fees.

But, if brokers as traders make money. Well, they do.

In fact, brokers that function as market makers or a hybrid between STP (Straight Through Protocol) and market maker, make money. They have special trading departments.

Forex brokers know retail traders have little chances to survive. As such, they base their trading on this statistic.

Literally, they take the other side of their clients’ trades. Between incomes from commissions and spreads, trading the opposite way is more profitable.

Who doesn’t want to be on the same side of a trade that has 90% chances to win?

Central Banks

Central banks function as independent entities. Some of them, though, are private.

The perfect example comes from Switzerland. The Swiss National Bank (SNB) is a private entity. Its shares are even listed on the stock exchange.

Parts of the profits made by any central bank comes from Forex trading. Not all of them.

Monetary policy implementation doesn’t mean buying or selling currencies. Or, not only.

It means making sure the financial system has enough liquidity, the banking system functions properly, and inflation stays under normal limits.

In this process, central banks make a profit. In any case, they have more chances to do that. They have bigger capital, know the monetary policy in advance, and can afford a draw-down here and there.

These are the most important entities that make it in the Forex market. But, not the only ones. Find out who else profits in Forex trading.