EUR/USD dropped today as US employment growth was bigger than forecast and the unemployment rate provided a pleasant surprise, falling last month. It looks like the major concern of investors — the high level of unemployment in the United States — gradually loses its strength.

Nonfarm payrolls grew by 200,000 in December, compared to the average estimate of 152,000. The November growth was revised from 120,000 to 100,000. The unemployment rate surprised market participants, falling to 8.5%, while experts predicted it to stay at the previous level of 8.7% (revised from 8.6%). (Event A on the chart.)

EUR/USD dropped to the low last seen in September 2010 as concerns about the European crisis returned to the Forex market, while the US economy continued to show signs of recovery. Today’s data was good, especially the unexpected advance of employment. That allows traders to believe that nonfarm payrolls will be better than previously estimated.

ADP employment climbed by 325k in December from November, proving wrong forecasters that expected a drop to 176k from 204k in the preceding month. (Event A on the chart.)

Initial jobless claims were at 372k (seasonally adjusted) last week, near the forecast value of 375k. The reading from the previous week was revised upwardly to 387k from 381k. (Event B on the chart.)

ISM services PMI rose from 52.0% to 52.6% in December, but was below a predicted reading of 53.0. (Event C on the chart.)

Crude oil inventories increased by 2.2 million barrels and total motor gasoline inventories increased by 2.5 million barrels last week. (Event D on the chart.)

Yesterday, a report on factory orders was released, showing an increase by 1.8% in November (in line with forecasts) after a drop by 0.2% in October. (Not shown on the chart.)

EUR/USD jumped today as China’s and US Purchasing Managers’ Index rose, while global stocks rallied, reducing demand for the dollar as a safe currency. The minutes of the FOMC meeting indicated that committee members believe that more stimulative monetary policy may be required in the future.

ISM manufacturing PMI was at 53.9% in December, a bit higher than the forecast value of 53.3% and above the November reading of 52.7%. (Event A on the chart.)

Construction spending expanded 1.2% in October, two times as much as was forecast — 0.6%. The September reading was revised from 0.8% to -0.2%. (Event A on the chart.)

The minutes of the Federal Open Market Committee meeting showed that the committee members considered the US economic growth to be robust, but were concerned about some problems, including the level of unemployment:

Members noted that information received over the intermeeting period pointed to somewhat stronger economic growth in the third quarter, partly reflecting a reversal of temporary factors that had depressed economic growth in the first half of the year. However, overall labor market conditions remained weak.

Some members thought that more accommodative policy may be implemented in the future, despite the positive signs, and one member thought that the current economic conditions warrant more accommodation now. (Event B on the chart.)

Following my recent post on “scaling in” in Forex trading, I’ve decided to learn the opinion of my readers about this technique. I’ve already asked about “scaling out” (closing positions partially) a month ago and the results surprised me with more than a half of voters being pro partial position closing. So today, it is time to find out your opinion regarding adding to a position, whether it’s winning or losing (both have their pros and cons). My own opinion remains the same — “scaling in” is useful only in a very limited set of cases and only when the account balance has increased suddenly. And how about you?

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First, I’d like to wish everyone a happy New Year. Today is December 31st and the trading of the year 2011 has already ended, so it’s time to wish successful trading to all Forex traders in the next year.

My forecasts for 2011 were a complete failure. Mainly due to the worsening of the eurozone debt situation and partly due to the slow pace of the global economic recovery. Let’s look at the individual trading instruments forecasts and the real outcomes:

EUR/USD — looking at the weekly chart of this currency pair makes me think that we are currently at the beginning of the next bullish wave that will mark the next year. Unless some highly improbable long-term bearish breakout occurs. we’ll see the EUR/USD pair heading to the levels above 1.43.

The pair ended up somewhat lower than where it had started the year. 1.43 was reached during the first four months of the year. A big miss here.

GBP/USD — although the pound was an outsider among the major currencies in 2010 and despite the high probability for it to continue going down in the first half of 2011, overall, the next year may turn out to be positive for this pair. I see a close of the year 2011 above level 1.66 for GBP/USD.

The pound has tried to rise, but its attempts turned out futile. Like the euro, it has fallen a victim to risk-aversion. Another big miss here.

USD/JPY, like all the yen-based pairs, suffered a deep drawdown this year. 2011 will be either very positive for this currency pair or the Japanese economy will take a lot of damage from such a strong national currency. The Bank of Japan will have to take some measures to weaken the yen and USD/JPY will benefit from it. I expect to see this currency pair between 90 and 95 by the end of 2011.

Although the Bank of Japan has really taken yen-weakening measures, which have even worked near the end of the year, the pair declined even more in 2011.

EUR/JPY will rise in 2011 even faster, as the EUR/USD is going to be up (unless some really bad thing happens to one of the Eurozone countries). A jump back to 128–135 range looks like a probable target for the euro-yen pair.

The situation with EUR/JPY was even worse as the pair has also suffered from the euro weakness.

Oil may experience another bullish bubble growth next year. The dynamics of this commodity during the last weeks of 2010 suggest that scenario. If that happens, oil will probably race to its record high near $140 before falling back to its more natural $60–80 range. If we won’t see a new bubble in crude, then I expect a higher range for 2011 — $80-$110.

Oil didn’t enter another bubble, but the year’s range was significantly higher than my forecast. So another miss here.

Gold has found its natural balance level, in my opinion. It will continue rising in 2011 but the process will be much slower than before. To me, it looks like all the big buyers already hold enough gold.

Not only did gold rise extremely higher than it had ended 2010, it also managed to fall significantly afterwards.

My forecasts on the interest rates weren’t very successful. Influenced by the lack of changes this year, for the year 2011 I also expect almost no rate hikes from the four most important global central banks. There is a small probability that near the end of the next year, the Federal Reserve will raise the rate slightly. Bank of England can also decide to shift the rates up and even do it earlier than the US regulator. ECB and the Bank of Japan will stay with their current rates next year.

I was right only regarding the BoJ rate — they’ve left it unchanged through 2011. I was also partly right about ECB — their rate ended 2011 where it’s started, but they managed to hike and cut it two times by 25 basis points.

OK, now to my 2012 Forex forecast. I remind you that you shouldn’t consider this forecast as a serious call to action or something worthy of using in your trading. Just look at my previous forecasts to see that I am not Nostradamus :). This year, I won’t provide a forecast for EUR/JPY since it’s repeating EUR/USD + USD/JPY analysis, but will add USD/CHF — another major currency pair to pay attention to.

EUR/USD — I believe that it will fall to about 1.25 in 2012 due the lack of fast and effective solution for the eurozone debt crisis. If the situation worsens there, the pair might even break down below that level. In case the fiscal problems will get solved (highly unlikely), I expect EUR/USD to end the year between 1.35 and 1.40.

GBP/USD screams for a strong bearish wave — both from the technical analysis and from the macroeconomics points of view. The problems of the eurozone will also be negatively affecting the pound next year. The pair can go below 1.40 and end the next year there.

USD/JPY will finally enter a bullish albeit very weak trend. The pair has little place to go down without turning Japanese exports into a joke. In my opinion, this pair has a strong chance of ending the year 2012 above 80.00.

USD/CHF will remain under influence of the EUR/CHF floor set and maintained by SNB at 1.2, which I expect to persist through 2012. The second strong factor will the euro’s performance. With stronger euro, USD/CHF may stagnate near the current levels. In case of a further euro decline, USD/CHF may surge to as high as parity.

Oil is in a long-term downtrend, but has a strong support level near $100/barrel. I believe that the price for this commodity will depend mainly on the geopolitical factors in 2012. War conflicts and political instability in the oil-producing regions will drive the price up. If the next year is going to be calmer than this one, oil may reach $100 and, if that level is broken, it may go down to about $90/barrel.

Gold is currently trading near a very important support zone. If it breaks down, there’s a plenty of space for a bearish action for this precious metal, with $1,000/ounce looking like a probable year end target. If gold manages to bounce off, it may test $2,000 psychological resistance during 2012 and probably go even beyond that level.

As for the interest rates, I choose to expect no changes both from the Federal Reserve and the Bank of Japan in 2012. The European Central Bank will be tempted to cut its main rate next year. I expect it to go down from the current 1% to 0.5% or even 0.25%. The Bank of England will probably have to do the opposite — hike the interest rate to curb the inflation. The bank rate may go up from the current 0.5% to about 1% in 2012.

Happy New Year! Let the 2012 be much better for you than all the previous years!

I’ve been reading very positive reviews of Peter Brandt’s book on Amazon for some time and, recently, I’ve decided to read the book myself to see if it’s really that good. Diary of a Professional Commodity Trader: Lessons from 21 Weeks of Real Trading turned out to be a rather unique book in a way that it’s the only Forex book that is based on the real-time trading experience rather than on the review of the previous charts and the past performance. Although the events described in the book are the past for the reader, they were added into the book on the go as they appeared. The book is worth reading just because of this particularity.

I cannot rate it as high as Trade Your Way to Financial Freedom by Van K. Tharp or Fooled by Randomness by Nassim Taleb. But this doesn’t mean that the book is bad, of course. It’s full of things to learn and old trader’s wisdom to gain.

Although it’s written in a form a diary, there are some learning chapters that clearly make more or less universal statements regarding the Forex/commodity trading. From those statement I would prioritize the following theses:

• It’s difficult to be profitable as an intraday trader. That’s why long-term trading should be employed.
• Long-term traders should pay little attention to charts after they’ve detected their patterns and have set their pending orders. Constant chart watching may lead to overtrading and other stupid errors.
• It’s impossible to forecast the markets using the chart patterns. Chart patterns in a union with the sound money management rules just provide some small edge to a trader. (In my opinion, the edge of a strategy is the same as the ability to forecast; otherwise the chart patterns would be useless.)
• It’s better to have 30 to 70 chance of winning each trade than 70 to 30. Can’t agree with that. Brandt offers three paragraphs of explanation of his point, but it doesn’t make sense to me. This statement is wrong just because it deals only with the probabilities rather than the trade expectancies.
• Months or even years of losses are normal to trader’s account history.
• The trading system should be adjusted to meet the current challenges, but it shouldn’t be optimized to fit the curve of the latest market events.
• Keeping a trading journal is a good way to find disadvantages of your own trading strategy.

The book possesses a short list of quite strong advantages that are worthy of mentioning here:

• The author (Peter Brandt) has almost 40 years of experience in commodity and Forex trading. 30 of which were overall rather successful. The trading records of his Factor LLC are audited.
• Detailed examples of chart pattern trading with a lot of useful info regarding various patterns’ reliability factors.
• Useful trading ideas (trailing stop rule, hikkake patterns, etc.)
• A complete set of steps for developing a successful trading plan with detailed explanation of each step.

Unfortunately, the book wasn’t as good as I have expected. It had several flaws:

• Some dubious statements. (See the list of theses above.)
• One of the trading technique mentioned is the money management stop-loss, which is basing your SL level not on your technical or fundamental analysis of the current situation but on the amount of money you can afford to lose. Needless to say that employing such a stop-loss technique is a wrong way to trade as it ruins the trading system.
• Not much details are given regarding the author’s choice of using trailing stop or other exit strategies for specific trades.
• The emphasis of the Diary may seem too long-term for many traders, with some example patterns spanning for years.

Diary of a Professional Commodity Trader won’t impress you, it won’t give you a profitable trading strategy, it won’t offer you anything extraordinary, but it will definitely make you start looking in a right direction and will ease your strategy development process with so many valuable trading ideas.

P.S.: The Kindle version of the book is full of errors. Perhaps the paper version is also ridden with them, but I haven’t had an opportunity to compare.

EUR/USD was falling today as Italy sold less debt than the maximum target at the auction and yield rose. The last US reports this year were good with the exception of unemployment claims that climbed last week. Currently, EUR/USD goes higher, erasing much of its losses.

Initial jobless claims rose from 366k to 381k in the week ending December 24, while forecasters promised an increase to just 372k. (Event A on the chart.)

Chicago PMI was at 62.5 in December (seasonally adjusted), little changed from the November reading of 62.6. A decrease to 60.4 was predicted by analysts. (Event B on the chart.)

Pending home sales advanced 7.3% in November, somewhat slower than in October (10.4%), but significantly more than was expected (1.7%). (Event C on the chart.)

Crude oil inventories increased by 3.9 million barrels, while total motor gasoline inventories decreased by 0.7 million barrels last week. (Event D on the chart.)

Almost a month ago I’ve discussed a technique called “partial profit taking” and its viability in Forex. Another name for this technique is “scaling out” as it allows a trader to scale the exit from his or her position. Today, I’d like to talk about “scaling in” — a technique that’s used to enter a position at more than one entry point before closing it.

Details

To easily understand the concept of scaling in, let’s look at the following example: a trader decides to buy 0.5 lot of EUR/USD at 1.3064, expecting that it will go up, then he buys another 0.5 lot at 1.3090 and, finally, scales in for the third time for another 0.5 standard lot at 1.3100. The position is then closed with profit at 1.3150. The resulting entry price of this 1.5 lot position was ~1.308467, which means that the end profit was $97.99.

Was it a good idea to increase the profitable position’s size in the case of the above example? Yes, surely. Considering that you already had a position entered earlier, if you’ve seen another entry signal at higher price level, it was a totally justified order to enter with some more capital. But is it always so? Is partial entry a technique that should be widely used with any Forex trading strategy? To answer this question we’ll have to review two entirely different scenarios of scaling in — scaling in at a better price (increasing volume of a losing position) and scaling in at a worse price (adding to a winning position).

Adding to Losers

On the one hand, buying even more when the price has fallen (or selling more when it has risen) makes sense — if you were expecting EUR/USD to rise and bought some at 1.3050, then, if you have some extra capital, buying some more at 1.3040 should look like a bargain. In case the currency pair will then move up to your initial target, you’ll end up with more profit than you have expected originally. Additionally, the reward/risk ratio on the second-entry volume would be better if the original stop-loss level is preserved.

On the other hand, increasing the size of the losing position is a straight road to Martingale trading, which will inevitably lead to the trader’s complete loss of the account balance. If the price has moved unfavorable in relation to the initial trading signal, the good chance is that the signal has failed itself or at least has become less reliable. This means that you are adding to a position that now has a lower probability of meeting its target — not a prudent decision for a trader.

In the end, it’s all dependant on the specific case, or to be more exact on some conditions. There’s an advantage in scaling into a losing trade if both of the two following conditions are fulfilled:

1. The original trading signal is still active — only a minor retracement has happened. For example, if the first trade was based on a breach of the chart pattern’s trendline, the retracement shouldn’t go back below the trendline.
2. There should be some new additional capital in your account. Otherwise your new trade will go against your risk management strategy. For example, if your risk tolerance per position is 1% of balance and you entered the initial trade with this risk in mind, you won’t be able to increment the position size without increasing the possible risk, unless your account balance wasn’t increased by some amount.

Adding to Winners

Winning positions are a different story. Adding to a profitable position seems like a good idea — after all, you are adding to a trade that’s already capable of moving in your target direction. Of course, a justified question is why haven’t you entered with the whole volume at the initial entry point? After all, you’d now have much more profit if you did.

There are only two reasons to use additional entry points for the winning positions:

• Another trading signal was generated by your trading system. In fact, it shouldn’t be classified as scaling in — it will be a completely new position, albeit in the same direction.
• New funds were added to the account, so that you could risk more per position than you’ve done initially. This can be a result of a new deposit or some other profitable position closed.

Conclusion

Some traders might believe that using scaling in is some fancy tool to trick the markets and get more profits, but in reality it rarely is such a tool. Scaling in should be used by Forex traders only on limited occasions — in case of a suddenly increased risk tolerance or a new signal for position opening.

EUR/USD was rising today, stalled, then sharply dropped, and currently trades sideways, remaining above the opening level. The gains aren’t big, though. The report about the US housing market wasn’t good, but manufacturing and consumer sentiment showed signs of improvement.

Seasonally adjusted S&P/Case-Shiller home price index fell to 138.53 in October from 139.42 in September. The index declined 3.4% from a year ago. (Event A on the chart.)

Richmond Fed manufacturing index edged up to 3 in December from 0 in November, while market participants hoped for an increase to at least 6. (Event B on the chart.)

Consumer confidence improved to 64.5 in December from 55.2 in November (revised from 56.0). The expected figure was 58.5. (Event B on the chart.)