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As the housing market weakens and jobs decline, it is likely that the Federal Reserve will be forced to expand its balance sheet by purchasing additional assets.

In other words, the Fed will likely need to resume printing dollars again in the not too distant future.

Tuesday’s dismal report on Existing Home Sales probably indicates a level of undershooting given that sales were pulled forward by the tax credit. But discounting for inflation, prices are back to late 1990′s levels while inventories are twice the amount (excluding the shadow inventory).

Meanwhile, last week’s report on New Unemployment Claims (500k), which covers the period of the BLS survey, indicates that the number of private sector jobs could fall between a loss or gain of 10,000 or so.

What is evident is that even with depressed prices and interest rates at record lows, the housing market is likely to remain very constrained as consumers, who still fear for their jobs, stay on the sidelines.

The U.S. economy has undergone a radical transformation during the Great Recession in that GDP has nearly returned to pre-crisis levels even as over 8 million jobs have been lost. The enormous gains in productivity means that employers are doing more with much less and that absent a growth in aggregate demand, are not likely to add to their fixed labor costs.

But demand from U.S. consumers cannot increase if new jobs are not being created and if demand cannot be created internally, the only avenue available is to import it. And in order to do that, the Fed will need to resume purchasing assets which means printing, and therefore depreciating, the dollar.

When might we see this happen? Not immediately, because despite some downward revisions, the Central Bank is still forecasting growth of around 3% in 2011, an estimate that probably is too optimistic. But as jobs continue to decline through the third quarter and into the fourth, Bernanke & Co. will be left with no alternative but to announce they intend to purchase another trillion dollars’ worth of securities.

The Chinese, shrewd as they are, are way ahead in this regard. Since annoucing on June 19 they would depeg and allow the yuan to trade in its 0.05% daily band, their currency has gained nothing on the dollar but has depreciated by just over 2.5% against the euro and by nearly 3.9% against the yen.

But a deeper look into these numbers is even more revealing. The yuan was depreciating by 6.5% against the euro back on August 9 as the dollar declined against the common currency, just before the most recent decline in the stock market prompted a risk-off trade back into the USD.

A move by the Fed to depreciate the dollar will force investors to seek higher yielding assets like stocks, because surely there will be little desire on the part of investors to hold on to an investment that is losing value. And although interest rates on Treasuries will tend to gain, it may work to the advantage of housing because those who are able to buy will be more inclined to do so if they believe that the cost to debt service will increase as time goes on.

EUR/USD has hit a major inflection point-a level I’m describing as a Critical Mass which could send the euro toward 1.3500 and then to the upper 1.38’s.

I last posted an article on July 27 entitled “The End of the Crisis Era” in which I said that “what we’re likely to see going forward are stocks trending higher and the dollar trending lower.” I based this on the idea that the European Bank Stress Tests marked the end of an era where systemic risk was a serious threat.

I ended the article by saying “if you’re a forex trader, sell the dollar and go take a vacation. And don’t under any circumstance put a stop on those trades.”

In reality, traders should always trade with stops. I do not at times, but only when I have a belief that there has been a fundamental shift which will be strong enough to get price moving in a trend (or continue the present trend).

In any event, here’s why I think that EUR/USD is at Critical Mass; with the close of trading on Aug 2, the euro is now over the 38.2 Fibonacci retrace of the decline from November 25, 2009 to June 6, 2010. And once price closes above this level (or below if price is trending down), there is a very good chance to see it eventually hit the 61.8.

Fibonacci also gives us something else to use-important support levels which serve as entries. Take a look at the smaller fib that I’ve been using to measure the retrace of the last decline from April 12 to June 7. Besides the 38.2, there were times when the 14.6 and even the 50 (which technically isn’t a number in the sequence) could have also been used to “buy low.”

Going forward, there’s a chance to be presented with just such an opportunity. While nothing in forex (or in life for that matter) is ever guaranteed, a close above the critical 38.2 will provide a good entry if we get lucky enough to see price touch that area in a search for support on its way to the 61.8.

The June Non-Farm Payrolls report (released on July 2) disappointed investors with the creation of just 83,000 private-sector jobs. On July 6, the non-manufacturing ISM report, which reflects about 90% of the economy, showed that the employment component turned negative after just one month of expansion.

Yet, stocks had their best week in about a year, with the DOW industrials gaining 511.55 points or 5.28% and the S&P 500 posting a gain of 55.38 points or 5.42%.

Why?

First, an assessment of the economic outlook from Nouriel Roubini probably reassured investors after Dr. Doom said that while he does expect a slowdown in the second half of the year, he does not expect to see the economy double-dip into a recession.

Second, after the previous week’s 5% decline, stocks were the cheapest relative to expected earnings since the market bottomed back in March of 2009.

Speaking of earnings, analysts upped their estimates for 2010, saying that corporate profits will post 34% gains for the year. You may want to ask how this might happen given that the job market remains weak, but consider the following:

1. The economy has added 882,000 jobs in the first 6 months of 2010, including 593,000 private sector jobs. But whether a job is private or government, an employed worker will still spend.
2. Productivity was up a strong 6.1% in Q1 2010 from Q1 2009, which means that companies are producing their goods and services at a reduced per-worker cost, which of course increases their bottom line.

Third, the latest figures on new unemployment claims fell more than expected. With 454,000 new claims, the indication is that around 100,000 private sector jobs are being created. Economists will be paying close attention to this number next week because the BLS survey will be done over the period, giving the most accurate indication regarding what July’s NFP will say.

Lastly, ECB President Trichet upped his assessment of European economic growth on Thursday, and the IMF bumped up its estimate for 2010 global growth to 4.6% from 4.2% on Friday.

Now, if you were bearish going into the week, don’t feel bad. Barton Biggs, who runs multi-billion dollar hedge fund Traxis Partners and who also served as Morgan Stanley’s chief of global strategy for many years, is a known bull who said in early May that he expected to see markets rise by another 10% to 15%. But on July 3, he told Bloomberg that he “sold stocks aggressively” and that he continued to “raise cash.”

I still remain bearish on the market primarily because I don’t see where significant job growth can come from. Big job gains are spurred by new innovation (think cars in the 1920’s and computers in the 1990’s) or by credit bubbles (think real estate in the 2003 to 2007 period), neither of which seem to be imminent. And with no new stimulus, the Fed holding its position (since it can not lower interest rates further and is unlikely to start expanding its balance sheet again, at least at this point), and with taxes rising for everyone come January 1, 2011, I believe that the market will start to price in a more negative outlook before too long.

As far as next week is concerned, the most important data is likely to come from second quarter earnings reports, specifically the guidance going forward. If downward revisions are made to the outlook, the recent pattern of price movement in the S&P will be continued.

If you look at the S&P chart, you’ll notice that since the market peaked on April 26 that a series of lower highs and lower lows has been made. If earnings guidance is weak, expect to see a new low made below the last swing low on July 1.

In this scenario, as is well-established, the dollar will benefit as the market becomes risk averse. Commodities will fall and Treasuries will rise (which means rates will fall below 3% again). Gold could see a pop as investors grow even more nervous about paper currencies.

Of course, should the guidance turn out to be favorable, the markets are likely to be well supported and could rise in a trend. In this scenario, we would see the exact opposite happen to the dollar, commodities, gold and Treasuries.

‘A trend in motion will tend to continue in motion until a major event takes place that would cause it to change its direction. Trends do have greater odds of continuation rather than reversal.” — Mike Baghdady (35-year veteran of the financial markets).

Hello:

The title of this small article was first popularized by that market legend, Jesse Livermore. Many successful traders are trend followers – following the line of the least resistance. Countertrend strategies can be quite profitable at times. But if one is wrong, the market can be unforgiving. It’s better to follow the trend (the only challenge is that new trends don’t always announce their arrivals). Though some may catch the trends early, depending on the trading methods they use.

I strive to make my points clear and simple. I invariably tell my trainees: analyze the markets and enter your orders. If you’re wrong, cut your losses when it’s clear the markets are no longer moving in your direction. If you are right, allow your profits to run. The principles that work are non-market specific. The reality is that the easy thing to do is not always right and the right thing to do is not always easy. There are judgmental errors we tend to make. We know the Golden Rule, which makes perfect logical and rational sense. Studies have however, shown that most humans will be more risk-averse in a situation of gain, and less-risk averse in a situation of loss. Dr Van K. Tharp calls this wrong psychological bias as being ‘’conservative with profits and risky with losses.’’

Simply put, many traders cut their profits and run their losses. The psychological reasons why they do this are beyond the scope of this small article. You might want to run your losses with the hope that the market could later turn in your favor. You might be right, but if you’re wrong, the losses would be far bigger. You might cut your losses with the fear that the market would soon go against you. You might be right, but if you’re wrong, you would have missed far bigger profits. Going against the Golden Rule was my major habit when I was a novice trader. You may be on the market for 20 years without learning your lessons – changing from one trading system to another, receiving one margin call after another, while you know these calls aren’t from pretty girls!

Sometimes the market mayn’t even go in your direction by 5 pips before reversing permanently against you. If I cut a loss at -80pips, the market may later turn in my favor or move further against me by -500 pips. If I let a profit run, a winning trade may go against me later or move in my favor by +700 pips. If I do the right thing and lose, I’ll be happy. If I do the wrong thing and lose, then that’s self-sabotage. Imagine what you’d have failed to gain if you’d cut your profits at +20 pips each on GBPJPY and GBPUSD last week, and what you’d have lost if you’d let your losses run in the same week (please check your charts).

Whenever you set your stop loss and take profit, you just need a good RRR for it to make sense. For example, does it make sense to use a stop loss -400 and a take profit +15 for every trade? Let me conclude with more quotes from Mike Baghdady:

1. ‘…It takes a great deal of time for a trend to change.’’

2. ‘A loss in momentum is not a sign of trend reversal, it is merely a pause.”

3. ‘Prices NEVER – EVER move in a straight line. Just by accepting this simple truth of how the prices behave, you will stop trying to pick tops and bottoms and view the corrections instead as an opportunity to take a trade in the direction of the trend.’’

Your questions and opinions are highly welcome.

Thank you.

Yours sincerely,

Azeez Mustapha
Forex Signals Strategist, Funds Manager &Coach

Email: amustapha@fxinstructor.com

NB: There is risk of loss in trading, but it is possible to be a successful trader.

Hello:

This is an update of the major movements on the markets and what I’m doing about them on weekly basis; plus my losses and profits. I trade 10 pairs. These analyses are based on hourly charts. I no longer compare timeframes as I used to do.

USDJPY
Trend: bearish
The overall trend is bearish. But USDJPY is ranging now. I have been on a sell order since yesterday. There could be a false/sustained breakout to either side any moment. But presently, the market is trying to move up.
Order: Sell
Entry price: 92.452
Stop loss: 93.186
Take profit: 90.086
Exit at: 93.186
Trailing stop: Not applied
Status: Closed, -75 pips

EURUSD
Trend: Bearish
I’m on a sell position. This pair is ranging for now. A big move may also happen soon.
Order: Sell
Entry price: 1.26810
Stop loss: 1.27568
Take profit: 1.24478
Trailing stop: Not yet
Status: Open, 15 pips

GBPUSD
Trend: Bearish
I know a famous psychic who was always contacted by traders in order to know the direction of this pair. Over a long period of time, the psychic has only 50% accuracy. GBPUSD is very volatile. I sold it and it hit my stop. I was glad. It has moved upper since then, though the sellers are still struggling against the buyers.
Order: Sell
Entry price: 1.48327
Stop loss: 1.49198
Take profit: 1.46084
Exit at: 1.49198
Status: Closed, -75 pips

USDCAD
Trend: Possible bullish, but currently flat
This pair is trying to bottom out, but USD is weaker than CAD. Even EURCAD is falling freely (though I don’t trade this pair). There should be either some weakness in CAD or a boost in the USD for this pair to move up.

AUDUSD
Trend: Bearish
I’m on a sell order. The market is trying to range, in zigzag manner.
Order: Sell
Entry price: 1.89758
Stop loss: 1.90496
Take profit: 1.87396
Trailing stop: Not applied
Status: Open, 13 pips

EURGBP
Trend: Bearish
I missed the first sell signal and hope to go short only if the second sell signal is generated at the necessary time.

EURAUD
Trend: Bearish
The pair’s effort to move up has constantly been rejected. I’m on a sell order. The bias remains to the downside.
Order: Sell
Entry price: 1.41576
Stop loss: 1.42357
Take profit: 1.39268
Trailing stop: Not yet
Status: Open, with 13 pips

EURNZD
Trend: Bearish
I entered short on this pair by mistake. The bias is bearish, but the entry signal hadn’t been met (I was thinking I was entering EURAUD). If the error entry had been profitable, I’d have accepted the responsibility as well. My entry criteria have been met now, but I’m not going to trade this pair again until next week.
Order: Sell
Entry price: 1.76686
Stop loss: 1.77496
Take profit: 1.74396
Exit at: 1.77496
Status: Closed, – 75 pips

NZDUSD
Trend: Bearish
The pair is trending in a zigzag manner. It’s trying to go up in the context of a downtrend. I’m on a sell order.
Order: Sell
Entry price: 1.71992
Stop loss: 1.72753
Take profit: 1.69653
Trailing stop: Not yet applied
Status: Open, 0.3 pips

EURJPY
Trend: Bearish
I sold short and my stop was hit. The market is now ranging.
Order: Sell
Entry price: 117.562
Stop loss: 118.382
Take profit: 115.298
Exit at: 118.382
Status: Closed, – 75 pips

Conclusion: There are good weeks and bad weeks. But this week hasn’t ended and I may still get back to my previous equity. I reduced my stop losses to -75 instead of hundred because I prefer smaller losses. If a market moves by 75 pips, the chances of it moving to 100 pips or further is very high. I try to cut all losers and attempt to rider winners for meaningful profits.

Your questions and opinions are highly welcome.

Thank you.

Yours sincerely,

Azeez Mustapha
Forex Signals Strategist, Funds Manager &Coach

Email: amustapha@fxinstructor.com

NB: There is risk of loss in trading, but it is possible to be a successful trader.

Results Statement

‘Free advice doesn’t mean anything for most people.’’ — Dr Van K. Tharp

Hello:

You might click above for the results. Attached herewith are the trading results for the last week. The results are similar on live and demo accounts – only equities are different.

Trades Missed:
The pairs are GBPUSD, EURUSD, EURJPY, and AUDUSD. Honestly each of these pairs would have hit my targets if I saw my charts when my entry conditions were met. I was doing some forex training at an international training center. The Moving Averages had already indicated potential bearish movements, but I was only waiting for the RSI to confirm these. When they were confirmed, I wasn’t online, and before I knew, the trends had gone too far. I could still ride them and win, but I prefer not to enter late signals unless there are reversals against the trends. This action doesn’t guarantee any accuracy however. If I knock my head against the wall for missing nice trades, what would I do if I miss bad trades as well? Opportunities are always ahead, and sitting in front of your PC 24/7 doesn’t improve any data.

Losses:
NZDUSD: Buy = -$162.75
EURGBP: Sell = -$249.44

Profits:
USDJPY: Buy = $132.20 (62-pip trailing stop applied)
EURNZD: Sell = $309.84 (82-pip training stop applied)
USDCAD: Buy = $$291.02 (74-pip trailing stop applied)
EURAUD: Sell = $281.49 (80-pip trailing stop applied)

I was able to make over 6% returns last week – risking only 1.5% per trade. The battle continues this week. We have no control over the markets. It would take a mad genius with a significant amount of criminal energy to even think of manipulating trades against a broker!

Surfing the markets when your capital is at stake is no picnic. The markets are a battlefield; and no-one goes to battle without adequate training. There’s no Holy Grail anywhere (only risk management makes the difference) Top traders may even have more losers than winners and still survive; because of a sensible positive expectancy.

But if you’d been battered by the markets before, you can still make it. Falling down doesn’t spell a failure; staying down is a failure. Whether you’re a beginner or an advanced trader, you still have much to gain here. There are veterans of the markets and gifted instructors @www.fxinstructor.com. They are more than willing to guide you to success on your journey to financial freedom. Plus there are lots of freebies for you as well. You may want to contact them at: info@fxinstructor.com

Your questions and opinions are highly welcome.

Thank you.

Yours sincerely,

Azeez Mustapha

Forex Signals Strategist, Funds Manager &Coach

Email: amustapha@fxinstructor.com

NB: There is risk of loss in trading, but it is possible to be a successful trader.

‘I don’t believe I am the only person who cannot predict the future prices.’’— John W. Henry (Traders Hall of Fame)

Hello:

We tend to have overwhelming desire to duplicate the trading results shown to us by marketers. It’s very easy to think of what we can gain instead of thinking of what we can lose. If we have confidence that the market will move in our favor, why shouldn’t we risk about 30% of our equity per trade? But thinking that our imminent order could be a potential loss, we may play safe by risking very low.

Risk management is a protection to our nerves and accounts and sweats. If I have a risk of only 1.5% on a trade, I can walk away with rest of mind, since I know I cannot lose more than 1.5%. It’s very dangerous to think we know what we are doing. It’s this mindset that makes some traders risk more on a trade. They feel that, based on their analysis, a trade must win. Having a belief of what the markets are going to do is futile: you’ll always be disappointed. No software can predict the future, because some counts may be inaccurate.

I’ve seen a trader who made over 500% profits in 2 weeks, without even using stop loss – only to lose all of them when there were mad reversals in the markets. In the middle of last year, another acquaintance of mine made 500% in 7 weeks – using a worse expectancy system, with several similar orders per pair. His whole community was singing his praises until he lost almost all his money about 2 months later (when his system underwent some baptism of fire). The road to success is bumpy. If you lose up to 50% of your initial deposit, then you need to go for further training. But most of us will simply increase our position sizes and make aggressive entries so as to recover all the money lost (taking revenge on the markets). One may feel lucky by going against the Golden Rule and risk management, but one’s lucky days would always be numbered.

Gamblers always look for jackpots; experienced investors prefer very small, but consistent profits over a long period of time. Someone told me that there was a year when many funds managers lost, but one funds manager survived the year with 1.1% profit (Isn’t +1.1% better than -1.1%?).

With a terrible system, you can meet your objective with sound risk management. Without risk management, even a superb system may not survive in the long run. This is because the average losses are bigger than the average profits. When you think you have a good system, you need to realize that managing risks is the way to achieve your objectives with the system. You need not be a genius to make money from the markets; neither do top traders have any special secrets. They simply keep doing the same things always, aborting losses and trying to ride winners.

You need to know that top traders are sometimes wrong. You need to accept everyday losses as part of trading. While you can’t avoid losses, you can control how you react to them. Once you accept this, you have nothing to fear. If you face your fear, it cannot affect you.

I would like to conclude this article with this quote from Loren Fleckenstien:

‘Position sizing has another valuable benefit. It improves on gains during winning streaks. During winning streaks, your capital grows, which slowly leads to larger position sizes. During losing streaks, position sizes shrink with your account, leading to smaller loses.’’

Your questions and opinions are highly welcome.

Thank you.

Yours sincerely,

Azeez Mustapha
Forex Signals Strategist, Funds Manager &Coach

Email: amustapha@fxinstructor.com

NB: There is risk of loss in trading, but it is possible to be a successful trader.