Day 5, Profit after a hard day

The 5^th day was a positive day. It was the first day in which the algo was triggered in Euro FX future, known as 6E in CME. Until this moment, the algo was executing orders only in the British Pound futures. Let’s have a look at both instruments:

Euro FX

The algo performed very well showing its real purpose. It entered long in a retracement and luckily after that, the Euro went up. It was a very directional day.

6E 06/20 

 

As you can see there were only 2 moments in the day in which the position was losing money.

Orders 6E 06/20

The final profit was $1657.50. 

British Pound

As I said before this currency cross has been recently quite volatile in comparison with the Euro/USD. I believe that the news has a bigger impact on this instrument.

6B 06/20

I was looking at the different parameters when the notification popped up on my screen. At that moment, I had a feeling that this trade couldn’t end up in profit. I saw the P&L falling continuously for an hour. After that, the price went up to the point in which I entered. I felt a little relieved but I knew that it won’t last. It dropped again making a double bottom. Even if I don’t believe or follow the charts, I had a little belief that maybe the price will go up again breaking the confirmation line. I was right. The price went from 1.2292 to 1.2395. As soon as the US trading session started, the USD raised versus other currencies. This pair plunged to 1.2303 from the maximum of the day. I believe that after a big movement the prices always revert to their mean but we need to be careful in the current situation. I was lucky because the price recovered more or less 60% of the last downside movement and at that time, my algo closed the position making a small profit.

Trade 6B 06/20

As you can see the MAE shows that at 1 point I was losing more than $1400. We can also see a big MFE showing almost $1800, that was reached after the double bottom. Sadly, as you know, even if it’s not real money, the final profit was far from the MFE. This is why the End Trading Drawdown shows up as $1373.75 the difference between the maximum favorable excursion and the final profit.

Final Profit

The final result was $2127.50. I was happy to have this profit after the losses from the previous week.

Thanks for reading this post. 

Europe situation, Euribor, one of the best trades from 2017

Mario Draghi didn’t surprise the market with his speech. He acknowledged a moderation in the pace of the eurozone recovery but he said that it´s early to change the monetary policy. Some analysts believe that the ECB will wait until July to provide forward guidance. I don´t want to speculate but maybe the dovish message was due to the strength of the euro. I would like to remind you that the ECB is buying assets for the value of €30bn a month. The question here is what is going to happen with these markets as soon as the central banks stop these quantitative easing programs.

Euribor Spreads

I will use the Euribor contracts listed in Eurex because I don´t have access to the ones listed on ICE. Sadly these contracts aren´t traded as much as the ones on ICE but they show similar prices. 

     Euribor Jun18-Jun19 spread, source: Barchart

The difference between these contracts is narrowing what indicates a flattening of the Euribor curve. It seems that the current level can act as a support.

     Euribor Jun19-Jun20 spread, source: Barchart

As you can see the curve steepened from September 2017 to March 2018. At the moment is near the support at 0.400. The Jun20-Jun21 spread has the same shape and this is very interesting for me. In the case of the Eurodollar, you can see how the spreads show that the curve is steepening for one period in flattening after 2020. The truth is that the ECB hasn´t changed the policy in the last 8 years and the inflation is still low. Can we see any movement in the outrights?

    Euribor Jun18 futures, source: TradingView

This contract changed the trend one year ago. In my opinion, the European economy looks pretty much the same as 2017.

     Euribor Mar19 futures, source: TradingView

This contract is more volatile but it shows exactly the same movement as the previous one.

Euribor Dec19 futures, source: TradingView

The last 3 charts show how the different futures went up in 2018. What are they discounting? Is the current European economy worse than in 2017? Will we have a global recession in 2020?

One of the best trades

We have briefly seen how the Euribor futures behaved during the last year. As I said the European Central Bank hasn´t changed the economic policy while the Fed has been raising rates for a while. Considering this, the idea was clear: long Euribor futures and short Eurodollar futures.

    Euribor Dec18 – Eurodollar Dec18 Spread, source: TradingView

This trade has been amazing (and I think that it can continue at least for a couple of months) and probably we will read about it in the next “Hedge Fund Market Wizards”.

Sum up

The ECB delivered the words that we expected. Draghi has a difficult job and the protectionism threaten doesn’t help. The Euribor futures are not moving at all, their movements are tied with the European Central Bank forward guidance and the data. The Euribor-Eurodollar spread has been one of the best trades from 2017. It has captured the different economic policy in two economic areas. 

Disclaimer

I wrote this article myself, and it expresses my own opinions that shouldn't be used as a trading advice. Trading carries considerable risk due to the high leverage involved

US CPI is King, at least for the interest rate derivatives

I’m a big follower of the economic data. I follow closely the inflation figures because the interest rate markets usually move. It’s difficult to say what you should trade in this situation but it´s easy to predict the direction of the movement. Let’s see what happened and how the markets reacted.

US CPI surprise

I expected a figure in line with the expectations. Maybe, my expectation was driven by the lack of surprises in the European inflation, but I was wrong this time. The US CPI (YoY) was released showing a better than expected figure, 1.8% vs 1.7% expected. At the same time, the US CPI (MoM) showed 0.3% vs  0.2% expected. The party started and the futures markets started to move.

Market reaction

The sell-off in eurodollar futures was expected after the economic indicator release. Let’s start with the 10Y T-Note Futures.

10Y T-Note Futures March 18

    Source: TradingView, 10Y T-Note March18 future, 30 min

Good downside move, you can see the importance of this movement in the traded volume in the 30 minutes after the release. It’s not valid to sell at any point, as you can see this future went up after 14:00 London time.

Eurodollar December 18 future

    Source: TradingView, Eurodollar Dec18 future, daily

This is a great example of how the American economy has improved from 2016.As you can see it´s in a downtrend since September 2017.

    Source: TradingView, Eurodollar Dec18 future, 30 min

You can see the importance of the data and the scale of the movement in the 30 min chart. It´s funny to think that 7 ticks move is big but you should consider that the size of the trades is usually higher than other futures with more volatility. If there is not a release or news is strange to see big movements in this kind of products.

Different examples, across the interest rate curve 

     Comparison Eurodollar futures Dec19, Dec20, Dec21, Dec22, own elaboration

All the maturities behave exactly as the December 2018 contract shown before. The December 2021 is different, someone sold at market just in the moment of the release or a little bit before, this is why there is a big gap. The most important thing is that the dec21 move was smaller than the dec20 and dec22. I can see that in the volumes increased in the bounce back for Dec20 and Dec21. It means that the traders don’t want to be short in this maturities. It’s difficult to say if there will be a possible slowdown in the US economy in one year time but I  don’t dismiss this scenario.

Eurodollar Spreads

     Source: TradingView, Eurodollar spread Dec18-Dec19, daily

We can see that this spread is trying to go up from the min of 0.1400, this means that the outlook for the next year is positive. The main problem, and it will be highlighted in the next chart is that the long-term chart shows how the spread is tightening. 

     Source: TradingView, Eurodollar spread Dec20-dec21, daily

I´ve selected this spread because shows a clear downtrend. After checking, the Dec19-Dec20 spread shows the same pattern and we can think about the slowdown scenario mentioned before.

Sum up and opinion

I hope you like it. Following the economic indicators and how they affect the markets is one of my hobbies. I’m looking forward to bring this interesting subject and explain the concepts clearly. As you have seen, the better than expected US CPI generated a sell-off in the US bond futures and in the interest rate futures across the whole curve. This doesn’t mean that the rally in equities will last forever and there are signs that could be a slowdown in the US economy in the coming year or year and a half. In terms of the US equity market, I think that it will keep going up in 2018. I use the bank earnings as a leading indicator of the economy.

Have a good trading!!

Disclaimer

I wrote this article myself, and it expresses my own opinions that shouldn't be used as a trading advice. Trading carries considerable risk due to the high leverage involved

Technical Analysis of EURUSD, GBPUSD, USDJPY

Let’s check the most important levels of the main currencies. We have seen a strong dollar during the last two weeks.

Euro

    Source: TradingView, EURUSD Dec 17 Futures

We can see that the dollar has been rising in the last sessions. The US macroeconomic data is strong and the FED officials confirmed that they will keep raising the interest rates and they will start to taper the buying of government bonds and other assets to support the economy. On the other hand, we have Europe, which has improved a lot since last year. The weakest leg is that European inflation is not increasing as the BCE would like. I can see a strong resistance around 1.17235. We can see the shade created on the Friday´s candle. If it fails to break this support, it will look for the first resistance at 1.18020. These are the levels I consider important:

Resistance 3	1.20965
Resistance 2	1.19550
Resistance 1	1.18020
Support 1	1.17235
Support 2	1.15460
Support 3	1.14435

GBP

    Source: TradingView, GBPUSD Dec 17 Futures

The British Pound has suffered a big fall since the double top in the middle of September. As I comment before it has been driven by the strong US macroeconomic figures. I´d like to add that Kevin Warsh popularity is soaring a he can become the next FED president. Considering him as a hawkish, his election will boost the USD. The UK is negotiating the Brexit with Europe, this can add uncertainty to the GBP. This contract has broken the 20 and 50 EMA and it’s near the 200 EMA. Maybe this is not relevant for trading but it´s one of the things that the people look at. These are the levels I’m looking:

Resistance 3	1.3615
Resistance 2	1.3283
Resistance 1	1.3153
Support 1	1.3066
Support 2	1.2952
Support 3	1.2848

JPY

   Source: TradingView, JPYUSD Dec 17 Futures

This is one of my favourite currency pairs. It moves really well according to fundamentals and technical levels. I expect that the USD will raise vs the JPY. It´s above the exponential moving averages and fundamentally is strong.  I would be surprised if the price goes back to  1.12 and then looks for the 1.1340s level.

I´ve quoted this contract in JPYUSD instead of USDJPY, this is why I’ve included two columns with prices:

Resistance 2	0.88160	1.1343
Resistance 1	0.88835	1.1257
Support 1	0.89905	1.1123
Support 2	0.90945	1.0996
Support 3	0.92225	1.0843

Have a good trading.

Disclaimer

I wrote this article myself, and it expresses my own opinions that shouldn't be used as a trading advice. Trading carries considerable risk due to the high leverages involved

Why is good to try alternative trading strategies such as spreads?

When we think about trading, the first image we have is Wall Street, Canary Wharf, Frankfurt,  Chicago, Tokyo, Toronto, Singapur, Hong Kong, big investment banks, hedge funds, asset managements.

    Own elaboration

One of the biggest mistakes is thinking about getting rich quickly trading the financial markets. It doesn’t matter how many books you read or how qualified you are. Obviously, it helps but it's not enough. Also, you should consider that you can’t compete with the institutional investors and Banks as they can afford advanced technologies and they employ a lot of people.

The most important thing is risk management. Being focused and learning by doing is very important as well. Maybe you have a full time job and you would like to try to get an extra income from trading. If this is the case, you need to adapt your trading style to your situation. Maybe, instead of doing day trading, you need to look for a medium or long-term strategy.  If you are an individual trader or investor (not professional) I’d recommend the following steps:

1. Choose the market you want to trade with.
2. Making a trading plan and assessing the risk you are willing to take per trade (I wouldn´t risk more than 2% of the portfolio)
3. Adapt the strategies that suit with your current situation, and backtest them if possible (the best way is open a paper trading account) before using real money.
4.  Start trading and adjust the strategies if needed.

Trading is a long tough journey and carries a high risk even more if you use leveraged strategies. These 4 steps are a sum up about the whole process, I think I can make 20 steps or even more but it’s not the purpose of this post.

Spreads

    Source: TradingView, Eurodollar spread GEH18-GEZ18

This is a spread between two contracts of eurodollar interest rate futures. In this example, I’m using the Jun 18 and Dec 18 contract. As you can see it moves really well with less volatility than trading the outright. Let me make it clear with the following capture:

    Source: TradingView, Eurodollar spread GEH18-GEZ18 vs GEZ18

I´ve represented the Eurodollar Dec 18 futures in blue and purple while the spread between Jun18 and Dec18 is green and red. You can’t see the differences in the chart due to the scale but while the outright made a move of 40 ticks the spread move only 14.

The logic between the spread is different from the outright, you are trading the differences between 2 contracts.Basically, you are betting that the difference between both contracts will increase or decrease. 

The advantages of this strategy are:

1.  Less volatility
2. The margin required is less than the one if you trade an outright
3. You can do the spread between 2 different kind of futures (intra spreads, inter spreads)
4. You can take advantage of seassonality in commodities (I will write an article in the future)
5.  There are Exchange traded spreads, that you don’t need a specific funcionality in your trading platform

The disadvantages:

1. You need to know that you are trading the difference between two contracts so the logic is different
2. Higher execution cost
3. You need an autospreader or an specific functionality in your trading platform that is expensive

I hope you like it. I will write about different strategies in the future. Let me know if you are interested in an specific one. 

Disclaimer

I wrote this article myself, and it expresses my own opinions that shouldn't be used as a trading advice. Trading carries considerable risk due to the high leverages involved

Is the market prepared for a couple of interest rates hikes?

As you know, The FED is planning to raise interest rates several times in the near-medium term and they will start to slowly shrink its big portfolio of bonds and assets this year. It’s difficult to know what is going to happen once they start the tapering. Even with the adverse effects of the hurricanes, anyone can´t have doubts about the US economic outlook. The GDP growth will be around 2.4% this year with almost full employment. My biggest concern is the US debt. I think the tax proposal can boost the US economy. 
Economics is a difficult science, it´s difficult to predict the individuals' behaviour but let´s check how the markets are pricing all of these facts.

   GEZ17 futures

This contract is testing a support. I think this contract will be between the 98.5350 and 98.480. 

    GEM18 futures 

The Jun contract has more volatility than the December contract. I broke the support in 98.320 and now it's testing the low of May. This maturity is one of the most interesting because if we have 2 interest rates hikes (December and maybe March), it will look for levels around 98.15 or even lows of the year.

    GEZ18 futures

December 18 is more directional that Dec17 and Jun18. If the economy performs as we have commented, this contract should look for lows. It´s a long time and it´s more difficult to predict. I'm sure that we will see lower prices in the near term.

I’ve chosen these futures because they provide an idea of what the market expects from the FED and the US economy. Having in mind that the last interest rate hike was in June and after the hawkish September meeting is better to be short in this kind of markets as well as the fed funds futures. 

Trade Idea

     GEZ18 futures

Maybe it’s late to short the GEZ18, but I think that it can go down to test the support around 98.085 in the coming days. I would protect this trade with a stop around 98,180. I like that the volume has been increasing since the beginning of September. Another strategy would be a long spread GEZ17-GEZ18, betting that the differential between this two contracts will increase. This strategy offers less volatility but higher costs and it's difficult to execute this trade without the right tools.

Disclaimer

I wrote this article myself, and it expresses my own opinions that shouldn't be used as a trading advice. Trading carries considerable risk due to the high leverages involved