On Monday, May 23rd, US President Joe Biden unveiled a new trade pact with twelve Indo-Pacific countries called the Indo-Pacific Economic Framework (IPEF). The launching of this deal, coupled with Monday’s news that the Biden administration is considering the merits of rolling back tariffs on imports from China, saw the Dow close nearly 500 points higher on Monday while the DXY fell from 103.04 to 102.04. These significant movements have thus far extended through this week into a 1200+ point rally for the Dow and a drop in DXY below 102, fueled by further news such as a seemingly palatable FOMC agenda and optimistic economic growth predictions from the Congressional Budget Office. With this context in mind, let’s consider what IPEF could mean for US markets.
What We Know
The following countries are the initial partners: Australia, Brunei, India, Indonesia, Japan, Malaysia, New Zealand, the Philippines, Singapore, South Korea, Thailand, Vietnam, and the US. Fiji will now be joining as well. The aggregate economic output of these countries is the equivalent of approximately 40% of the world’s GDP.
Significantly, this deal is not an actual free trade agreement, and thus there will be no traditional trade incentives between the US and its partners, as this would require action from Congress. Rather, the pact is ostensibly built on four ‘pillars’, which are, in no particular order: a) improving supply chains, b) encouraging infrastructure and green energy investment, c) promoting trade, and d) reformulating taxation and anticorruption measures.
What We Don’t Know
As many journalists have pointed out, we have few concrete details to work with just yet. While the broad brush strokes of the deal are sweeping, and could feasibly have all sorts of economic and geopolitical implications, negotiations have yet to deliver any concrete particulars, and thus traders and investors are currently in the dark when it comes to the minutiae and fine print.
While it is not fundamentally a free trade agreement or a trade bloc, it is not yet clear to what extent it could end up resembling one, or to what degree it could mirror the eventually ill-fated US involvement in the Trans-Pacific Partnership. It is also unclear how, if at all, the new agreement will compete with the Regional Comprehensive Economic Partnership (RCEP), a set of free trade agreements that have formed the largest trade bloc in the world, which includes most of the countries involved in the IPEF, as well as China and others.
Possible Market Outcomes
While it is too early to know what long-term effects the currently amorphous IPEF will have on US markets, it’s launching appears to have been a bullish fundamental catalyst for the stock market this week, and a bearish catalyst for the DXY. Rather than making any judgments about its consequences in these early stages, the wiser move would be for traders to keep their eye on the pact as it evolves over time, as it may be ripe with future fundamental catalysts.
However, it seems probable that the long-term outcome of IPEF will fall between two general possibilities: either 1) the deal could pan out to be relatively fruitless and toothless, and have little to no real impact on trade, foreign investment, and GDP growth expectations in the US. In that case, there would be little new to report on in terms of fundamentals and corresponding market volatility. Or, 2) the deal could gain traction and yield results somewhat comparable to a free trade agreement. Historically, this can entail increased GDP growth expectations, increased job outsourcing, increased trade deficits, and other conditions in the US that are relatively bullish for the stock market and bearish for the DXY, government bonds, and other safe haven assets. To what extent either of these transpire, we will have to wait and see.
EURUSD saw a breakout to the upside of a four month long bearish trendline on Monday, as bullish momentum caused it to close over 120 pips higher on big monetary policy news from the European Central Bank (ECB). Christine Lagarde, the ECB’s President, announced they will be pivoting away from net asset purchases, and subsequently negative interest rates, in the next several months. At the time of writing this, the EURUSD sits at 1.072 as buying pressure continues. With that in mind, let’s dive deeper as we explore how to trade EURUSD now.
As mentioned previously, EURUSD bulls have a lot to be excited about. Lagarde described the next steps in the eurozone’s monetary policy agenda as being something of a “turning point”, which is especially significant when traders consider that negative interest rates were an ECB precedent prior to Covid-era ultraloose monetary policy. This new direction, interpreted in conjunction with rising inflation in the eurozone, along with a solid 0.4% Q1 increase in seasonally adjusted GDP for the EU, are particularly validating for eager buyers.
However, when looking at the greater economic context, things may not be quite what they seem; peripheral, yet significant, data paint a bleaker picture for the EU than what the bullish momentum currently reflects. Unemployment in the eurozone is nearly double that in the US, the ECB lags far behind the Federal Reserve in terms of rate hike aggression, and the EU has gradually phased out frequent trade surpluses for deficits. On top of this, Europe is still in the throes of contending with the war in Ukraine and corresponding sanctions, with an EU embargo on Russian oil expected in the next few days. Thus, I estimate that the recent buying pressure for the EURUSD will be short lived, or perhaps only premature.
The recent breakout to the upside of bearish trendline(s) is impressive, with the historic 1.04 support level having prompted a powerful reversal for the EURUSD. However, I am anticipating a retest of the significant 1.07-1.08 resistance zone, and a return to bearish momentum. I imagine this retest will correlate with the DXY seeing a retest of its 1.02 support level, once a significant resistance level in March 2020. Thus, I entered a short position in the EURUSD at 1.07, and I am hoping to take profit at 1.04.
According to A1 Trading’s EdgeFinder tool, 31% of retail traders are currently long on EURUSD, while 69% are short, a bullish indication. This pairs well with the current COT data, which reveals about 75.5% of institutional traders going long on the USD, a decline of over 1%, while over 52% are long on the EUR, up nearly 0.5%. It is also important to note that this data, released on Friday, has not captured the bullish sentiment we have seen so far this week. However, I am still anticipating a return to form for institutional traders, wherein their orders will once again align with the general economic pessimism in the eurozone.
One of the things that makes retail trading unique as a pastime, or even a career, is the degree of honesty and self-reflection it requires. There are many jobs that offer some consistent semblance of leeway when it comes to making mistakes and honing a skill set, but trading is not one of them. No trader can negotiate a raise with the markets or hope for the markets to recognize their hard work; if anyone is not careful with their expectations and risk management, even just one losing trade can be catastrophic. Hence, why truthfulness matters in the world of retail trading: it often spells the difference between passive income and financial ruin. With that in mind, let’s explore 3 lies traders should avoid today.
“My strategy doesn’t need stop losses”
Regardless of a trader’s win rate, every trustworthy strategy incorporates stop losses to some meaningful degree. This is because it is as near certain as statistically possible that unmitigated risk in trading will eventually have terrible consequences. Even if a strategy somehow achieved a win rate over 95% with consistent incremental gains, unchecked risk would still be present in every trade, resulting in a handful of losses that could easily erase all prior profits in a fraction of the time (I know this from personal experience). Stop losses, especially trailing ones, are thus an indispensable tool for traders when it comes to safeguarding against inevitable losses and making their wins count in the long run.
“I will compound my account so fast”
Building a large trading account is a long, gradual process that requires plenty of discipline and patience. Because of this, if a retail trader approaches entering and exiting positions through the lens of a get-rich-quick scheme, they are bound to become disappointed and discouraged, and likely lose money along the way due to over-leveraging and impulsive trading. Thus, it is important for traders to generate realistic expectations for themselves, and not take success for granted. Some ways to practice this include a) thoroughly backtesting any strategies of choice, b) avoiding trading out of financial desperation, and c) recognizing that your value as a person has nothing to do with your account’s performance.
“Fundamentals don’t really matter”
Technical analysis is a wonderful tool for every trader to have equipped, and there are myriad technical indicators worth exploring and adding to any strategy. Likewise, sentiment analysis is valuable as well, since anticipating buying and selling pressure is at the heart of trading as a discipline. However, even with these two crucial forms of analysis at our disposal, it must never be taken for granted that traders are buying and selling real securities.
In a new age of gamification and excessive speculation fueling price action volatility in the markets, it can become easy to believe, even subconsciously, that trading is reducible to a worldwide chart-reading game. Therefore, it’s possible for many traders to miss out on significant fundamental catalysts and opportune points of entry and exit, because it is easy to forget that we are trading in real markets that are shaped by concrete circumstances and events in our world. Thus, whether a trader is buying or selling stocks, currency pairs, or bonds, it is always wise to conduct fundamental analysis, whether that be monitoring macroeconomic data, business fundamentals, or other variables.
Learn how to trade EURUSD, the largest and most traded currency pair in the entire world. The Euro is so heavily traded due to massive economies in the United States, and European union. The need for high volumes of currency exchange between these two areas makes the EURUSD a very popular currency pair to trade. The high trading volume in this pair makes it an attractive market to trade - for both experienced and new traders. One major advantage of trading the EURUSD is that this high trading volume usually leads to tighter spreads (and hence lower trading costs + easier execution!)
When trading the EURUSD, fundamental analysis plays a large role.
A major component to the Euro rising or falling has to do with the central bank policies of each respective economy. If the dollar for example is hawkish, and has a strong outlook for the US economy, it is possible to see the Euro fall, causing the currency pair to fall.
If the Euro is strong, and/or the dollar is weak, we would expect to see weakening unemployment in the US, and/or strong figures coming from the Euro region in things like inflation (CPI), retail sales, unemployment, etc.
When trading the EURUSD, technical analysis can be a useful tool to help with entries and exits. The EURUSD shifts from being a back and forth, choppy market, to a strongly trending market.
In times of back and forth, lazy price action, the EURUSD can be a great range bound market to trade. Simple Bollinger band, and support and resistance concepts can work great when employed properly during this time.
When the EURUSD is in a trending state, watch for breakouts on the higher timeframes, and pullbacks to key levels of support or resistance.
Our analysts share their analysis and trade ideas on EURUSD. Click the button below to view their analysis now!
Setting goals for yourself when it comes to your performance in the financial markets might not be as straightforward and simple as you may imagine.
It's essential to set a goal whenever you're working towards something in life, otherwise how will you ever know if you've achieved it? Goals can be motivating and are often really helpful in keeping you on the right track to achieving success.
However, it's just as important to spend time ensuring the goals are meaningful rather than purely inspirational and spur of the moment thoughts. Things that are actually going to help you reach a desired outcome and monitor your progress towards achieving it.
For example, when you set goals for your trading/investing progress, have you ever relied on statements along the lines of "I want to become more profitable" or "I want to open more great trades?".
I have to hold my hands up to that one, I've used goals like that in the past - most traders have! Unfortunately, these sort of blanket statements just fall into the category of 'easier said than done'.
We need to get more specific. We all set these blank goals in life. We set ourselves these vague goals often. Saying I want to be a profitable trader is just like saying I want to be able to run a marathon or I want to get all A’s in university.
To be able to truly achieve your trading and personal goals you need to get specific and consistent with your goal setting.
Each of us has different strengths, weaknesses, and past experiences that affect our trading. Some may be highly risky traders as they have not yet encountered a reality check by Mr. Market others may be risk averse. We all have different areas we need to work on in our trading approach if we want to progress and succeed in the markets to become profitable traders.
By using a blank statements about our overall trading, we're not really going to be measuring progress in the areas that really matter to us individually.
Rather than setting goals and measuring our success based on improvements only in our P&L, we should be identifying points that are holding us back and find an appropriate measure that shows progress in that specific area.
Many traders need to focus on their risk management (which I believe is the key to a long career in the markets) setting specific goals such as no more than 2% per trade or after 3 losing trades walking away from the screens. Stopping to trade when you feel that you will over trade or start revenge trading. If this is something you struggle with get some help! Invest in your education here with A1 Trading
Other traders may need to focus on not jumping the gun! Not entering into trades too fast, not checking macro-economic data or not looking at the economic calendar to see if there is high volatility news due, as we all know trading before major news releases is very risky.
By doing that, it will help us to focus our development plan in a way that's meaningful and encourage trading in a way that's more sustainable. Things that avoid us being tempted into risky approaches in an attempt to hit profit targets, without any improvements actually being made to our ability.
What's your ratio ?
To help put this in to practical terms, there's a quote from the book 'Good to Great' by Jim Collins that has always resonated with me. It's intended to apply to business, but I think it can also be adapted to apply to trading or any other area of your life you're hoping to improve.
"If you could pick one & only one ratio - profit per _____ - to systematically increase over time, what _____ would have the greatest and most sustainable impact on your economic engine?"
That's definitely something to really focus when making realistic goals regarding your trading. The word 'sustainable' is key here - we don't want to hit a profit target for the sake of it, but instead we want to see an improvement in our approach to the financial markets in a steady & sustainable way. Improvements that lead to dependable and repeatable returns in the market, not a one-hit wonder.
Have a think about you ratios as a trader - what would your ratio be that you want to improve? What would show that your performance as a trader / Investor is moving in the correct direction?
If you're an A1 member, let's discuss and share our specific trading goals in the discord server
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