Sentiment in the Forex Market E-Book

Jamie Saettele

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Trading Series
• Sprache: Englisch

Seitenzahl: 249

Veröffentlichungsjahr: 2012

Beschreibung

Crowds move markets and at major market turning points, the crowds are almost always wrong. When crowd sentiment is overwhelmingly positive or overwhelmingly negative ? it's a signal that the trend is exhausted and the market is ready to move powerfully in the opposite direction. Sentiment has long been a tool used by equity, futures, and options traders. In Sentiment in the Forex Market, FXCM analyst Jaime Saettele applies sentiment analysis to the currency market, using both traditional and new sentiment indicators, including: Commitment of Traders reports; time cycles; pivot points; oscillators; and Fibonacci time and price ratios. He also explains how to interpret news coverage of the markets to get a sense of when participants have become overly bullish or bearish. Saettele points out that several famous traders such as George Soros and Robert Prechter made huge profits by identifying shifts in crowd sentiment at major market turning points. Many individual traders lose money in the currency market, Saettele asserts, because they are too short-term oriented and trade impulsively. He believes retail traders would be much more successful if they adopted a longer-term, contrarian approach, utilizing sentiment indicators to position themselves at the beginning points of major trends.

Leseprobe

Contents

Title

Copyright

Dedication

Preface

Acknowledgments

Chapter 1: The Argument for a Sentiment-Based Approach

What is Fundamental?

Top-Down Approach

Reminiscences of a Stock Operator

Chapter 2: The Problem with Fundamental Analysis

How the Human Brain Works

The Myth of Economic Indicators

Nonfarm Payrolls

Gross Domestic Product

Trade Balance

Treasury International Capital

Producer and Consumer Price Indexes

Conclusion

Chapter 3: The Power of Magazine Covers

The Death of Equities—August 13, 1979

Magazine Covers in the Currency Market

Conclusion

Chapter 4: Using News Headlines to Generate Signals

Where to Look

Conclusion

Chapter 5: Sentiment Indicators

Commitments of Traders Reports

History of U.S. Futures Trading

Currency Futures History

Reading the COT Report

Using COT Data with Spot FX Price Charts

Understanding the Data

Watching the Commercials

Watching the Speculators

Commercial and Speculators Give the Same Signal

The Approach

Open Interest

Other Sentiment Indicators

Conclusion

Chapter 6: The Power of Technical Indicators

What is Technical Analysis?

Keep it Simple

What Time Frames to Use?

Support and Resistance

Determining a Bias

Fancy Momentum Indicators and Overbought/Oversold

When to Get Out

Chapter 7: Explanation of Elliott Wave and Fibonacci

Who Was Elliott?

Fibonacci: The Mathematical Foundation

Ratios

Specific Setups

Some Differences between Stocks and FX in Elliott

Building Up from Lower Time Frames

Multiyear Forecast for the U.S. Dollar

Multiyear Forecast for the USDJPY

Conclusion

Chapter 8: Putting it All Together

Why Most Traders Lose

Developing a Process

In Conclusion

Index

Copyright © 2008 by Jamie Saettele. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

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Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

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Library of Congress Cataloging-in-Publication Data

Saettele, Jamie, 1982–

Sentiment in the forex market : indicators and strategies to profit from crowd behavior and market extremes / Jamie Saettele.

p. cm.—(Wiley trading series)

Includes bibliographical references and index.

ISBN 978-0-470-20823-6 (cloth)

1. Foreign exchange market. 2. Foreign exchange futures. 3. Investment analysis. I. Title.

HG3851.S23 2008

332.4′5—dc22

2008006112

To my parents, whose Love inspires me.

Preface

As public interest in the FX market has skyrocketed, so too has the amount of technical and fundamental research available to aspiring traders. An area that has failed to receive the same amount of attention is often considered part of the technical approach: sentiment. After the news releases are digested by floor traders, the fundamentals digested by economists, and the latest comments from the central banker are dissected, the market’s trend is still a product of underlying sentiment. That is the premise of this book. Much (if not most) of the information fed to retail traders is of little use when it comes to making money by trading. Trading is hardly as simple as buying or selling, because an economic indicator is good or bad. Similarly, the game is not as black or white as buying or selling, because price is above or below a moving average.

For one, I hope to prove that traditional approaches such as the economic indicator approach do not work. No consistent correlation exists between the U.S. dollar and U.S. economic indicators, but conventional wisdom says that the two move in lockstep. Why is this approach followed so fervently if its foundation is rooted in falsities? The reason that markets move in identifiable patterns is probably the same reason that many accept as gospel the conventional approaches to market analysis and trading that have marginally successful track records at best. That reason is the propensity for humans to follow the crowd, especially in situations as emotionally driven as trading. Although there are no doubt very successful news traders, the cost to the trader is significant: an expensive machine such as Bloomberg or Reuters, turbulent market conditions just after a news release, and most important—the emotional impulses that are our worst enemy in trading are heightened, and the ability to make a rational decision just after a news release is greatly reduced. I think that I can share with you a better (and cheaper) approach to analyzing and trading the FX market, an approach that will give you an edge, if only because you are not following the crowd.

Sentiment indicators such as the Commitments of Traders reports are followed by many market participants, but I have developed indicators with the data that are meant to pinpoint the few times each year that a market is likely to reverse. This helps to solve one of the biggest obstacles that many face: over-trading. By limiting yourself to making a decision when a specific set of circumstances are met, you are helping to solve the over-trading problem. Unconventional sentiment indicators such as news headlines and magazine covers offer some of the best trading signals every year. Not to be forgotten are more traditional technical tools such as RSI and slow stochastics. Is the conventional use, to indicate overbought and oversold levels, really the best way to go? I think that there is a better way.

What you will not find in this book are trade setups with rigid rules or money management tips. Markets are dynamic and the trader should be also. Money management will be different for everyone because everyone has an entirely different risk tolerance. What I hope that this book provides is a way for you to look at a specific market (and maybe others) for what it truly is: a collection of its participants that create a mind of its own, whose moves are endogenous in nature but, because of that very reason, can be exploited for profit.

Acknowledgments

I want to thank everyone that I work with at DailyFX but in particular Kathy Lien, who gave me a chance at DailyFX and convinced me to pursue this endeavor, Antonio Sousa, whose help with program trading through the years is indispensable, and Boris Schlossberg. Although Boris and I disagree on almost everything market related, he has helped me realize that more perspectives lead to a better perspective.

Chapter 1

The Argument for a Sentiment-Based Approach

At its core, sentiment is a general thought, feeling, or sense. In free markets, sentiment refers to the feelings and emotions of market participants. All of the participants’ feelings toward a specific market result in a dominant psychology that is either optimistic or pessimistic. Every change in price results from a change in the balance between optimism and pessimism. Price itself is a result of where collective psychology lies in the never-ending oscillation between optimism and pessimism. As oscillation suggests, the psychological state of a market experiences peaks (optimistic extreme) and troughs (pessimistic extreme). These sentiment extremes are what affect market tops and bottoms.

In the 1932 edition of Charles Mackay’s classic Extraordinary Popular Delusions and the Madness of Crowds, Bernard Baruch wrote in the foreword that “all economic movements, by their very nature, are motivated by crowd psychology.” Baruch went on to write in the same foreword that “without due recognition of crowd-thinking (which often seems crowd-madness) our theories of economics leave much to be desired.”1 It seems that so many, if not most, of the members of the financial community seem to forget these basic truths. Analysts, traders, and financial media members attribute reasons to price movements with an uncanny ease.