US Recession - Friday Unemployment Bombshell and How to Trade The Dollar
Currencies / US Dollar Jan 06, 2008 - 03:06 AM GMT
Jack Crooks writes: Recession is the operative word for the U.S. economy right now. The housing market is already there. And various other economic indicators are pointing straight down. Just look at the latest data that came out this week ...
The ISM Manufacturing Index report showed that 10 straight months of expansion came to a screeching halt in December. The measure contracted the most since 2003, and was much weaker than everyone expected.
Then, on Friday, the markets were hit with a bombshell — the U.S. unemployment rate hit 5%, the highest level in two years. The economy only added 18,000 jobs down from 115,000 in November. By the way, economists were looking for 70,000 jobs!
These are not good signs for the world's biggest economy, and investors slammed the dollar to show their displeasure.
Meanwhile, interest rates — the other key driver for the dollar's direction — are also heading the wrong way.
So you can see why the dollar bears still outnumber the dollar bulls. And I think the momentum will remain on their side for some time.
However, the dollar is already at an awfully low level, so I don't want you to get stuck in the perma-bear mindset.
Given the tricky conditions, I want to spend today talking about ...
My Four-Step Plan for Successfully Navigating the Currency Markets
I'm often asked if there is a particular secret to success in the currency market. The short answer is "no." But there are some key ingredients that are essential for success ...
Step #1: Develop a Realistic Approach
The Irish writer Oscar Wilde once said, "Experience is one thing you can't get for nothing."
He sure got that right! You can't expect the currency market to go your way all the time. And there's always something to learn.
Like a child, the currency market can viciously change directions on you in an instant; you must be flexible and prepared for anything.
And if you make a mistake, you have to get right back up and dust yourself off. Operating in a volatile market requires a lot of focus and a lot of guts. But the rewards can be great for those who persevere!
Step #2: Separate the Music from the Noise
If you let your emotions drive your currency trading decisions, they'll end up being your worst enemy. But, if you use emotions (yours and those of others) as a guide, you can do quite well.
If you focus too heavily on trivial moves in the market, you'll have a hard time making money, and you'll go insane along the way.
Instead, you've got to filter out the short-term gyrations and understand the ideas that generate the larger, more important moves. Sure, I watch the markets like a hawk. But I'm using all the action as a way to adjust my big-picture view, not reacting to every little up or down move.
Step #3: Always Be Humble
This one is tough, but you must accept the fact that at any moment the market can prove you completely and utterly wrong. This is hard for a lot of people to swallow; their ego stands in the way.
Again, I think kids are the perfect analogy. I've been married for 25 years and raised four children so I'm very aware of how dad's personal needs come last.
Likewise, I put the market first. There's no place for hubris or self importance. The minute you think you've got it all figured out, the market will surely knock you back on your rump. I've seen it happen too many times.
Confidence in your trading idea is one thing, but certainty will get you nowhere.
Step #4: You Have to Love It
Most importantly, you've got to love the process. If you don't enjoy learning more about trading currencies every day, you won't be able to maintain your edge.
This is critical, because in order to maintain an edge you have to do a lot of homework. Heck, here's the routine I use each day to increase my chances of long-term success:
Around 4:30 a.m. EST, I roll out of bed and fire up the coffee pot. Why so darn early? Because the currency markets never sleep, and a lot has happened since I went to bed. Getting up before the sun allows me to check out what's happened in overseas trading.
By 6 a.m., I'm reading all the news headlines. Some of my favorite sources are The Wall Street Journal and The Financial Times along with Bloomberg and the Dow Jones newswire.
Next, I see what some of the other commentators are saying. I look for contrarian views that go beyond the typical Wall Street party line. Caroline Baum of Bloomberg.com is very good, and Morgan Stanley's Global Economic Forum is a favorite of mine.
I'm usually able to go through this routine by the time major U.S. economic reports are released every morning. At that point, I already have an idea what to expect and can adjust my trading accordingly.
It's only 8 a.m., and I've already been up for three and a half hours. And I still have the entire trading day ahead of me! But I want to make carefully considered and consistently profitable trades, and this is the kind of work it takes to do that.
You may not have the time to do this. And that's why I'm here to do it for you. My kids are pretty much self-sufficient, and I have the time to do what I love. It's a great advantage, and I never take it for granted.
With a realistic approach, enough preparation and a touch of humility I find that I can sort through the noise and be a successful trader. And I'm glad you're along for the ride.
Best wishes,
Jack
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