2 Investing Implications of Higher US Rates

While U.S. economic data continue to come in mixed, the numbers still point to decent U.S. economic growth. That, along with some evidence of stabilization in international markets, has pushed the odds of a December interest rate hike by the Federal Reserve (Fed) higher. As a result, real U.S. rates have been climbing.

As I write in my latest weekly commentary, “Digesting the Implications of Higher Rates,” I expect the rise in long-term rates in the U.S. will be contained, given several factors, including demographic trends and institutional demand for long-term, high-quality bonds. But the fact that U.S. rates, both long- and short-term, are rising while rates are falling in much of the rest of the world has a number of implications for investors.

How Higher Rates Impact Investors
1. The dollar will continue to strengthen, keeping pressure on precious metals. Over the past six weeks, while U.S. rates have risen, rates have declined in Germany, Italy and Japan, according to data accessible via Bloomberg. Looking forward, we will likely continue to see a divergence between U.S. and international short-term rates as central banks in these regions maintain easy money while the Fed tightens. This rate divergence helps explain the renewed strength in the U.S. dollar, which last week reached its highest level since the spring, as Bloomberg data show.

The combination of a strong dollar and rising real rates is having a predictable effect on precious metals prices. The simultaneous rise in real and nominal rates reflects the fact that inflation is contained and that puts downward pressure on the price of precious metals (since they are viewed as an inflation hedge, but provide no income, they consequently become less attractive). This time is no different, with gold and silver trading back down toward their summer lows, below $1,100 per ounce for gold, according to Bloomberg data.

Given this environment, I remain cautious on precious metals. Still, having a hedge against inflation in a portfolio is a sound strategy, and I prefer Treasury Inflation Protected Securities in that role.

2. A stronger dollar supports the case for hedged currency exposure in international stocks. I continue to like international developed markets, such as Europe and Japan. However, a strong dollar can erode the local gains made in international stocks. As such, given my expectation for further dollar appreciation, I believe investors should use vehicles that hedge most or all of their international currency exposure.
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3 Simple Strategies For Euro Traders

3 Simple Strategies For Euro Traders symbols

Euro (EUR) traders speculate on the strength of the Eurozone economy, compared to its major partners. The relationship between the Euro and US Dollar (USD) marks the most liquid forex pair in the world, with tight spreads and broad price movement that supports a continuous flow of profitable opportunities.

While there are many ways to trade the EUR/USD pair, three simple strategies have been consistently effective. These can be executed by forex traders at all skill levels, with newer participants reducing position size to control risk while experienced players increase size to take full advantage of the opportunities.

Equity traders can apply these techniques with CurrencyShares Euro Currency Trust (FXE), which tracks the forex pair in real-time. Leveraged and inverse ETFs can also be traded if you have the skills needed to manage the additional risk. ProShares Ultra Euro (ULE) offers double long side exposure, but it is thinly traded, at just 24,283 shares per day on average. ProShares UltraShort Euro (EUO) offers equal leverage to short sellers and greater liquidity, trading more than 700,000 shares per day on average.

Buy Or Sell The Pullback
The EUR/USD trend thrusts in both directions and carries the price from one level to another in a positive feedback loop that can generate considerable momentum. However, this rapid movement tends to fizzle out when the supply/demand equation shifts, often trapping latecomers in positions that will be excited for losses when the currency pair reverses and heads in the opposite direction.

The pullback strategy takes advantage of this countertrend movement, identifying significant support or resistance levels that should end the price swing and reinstate the initial trend direction. These levels often come at prior highs or lows as well as key levels defined by Fibonacci retracements, moving averages and the inception point of the original thrust.

Buy The Breakout/Sell The Breakdown
The pair often grinds back and forth within confined boundaries for extended periods, setting up well-defined trading ranges that will eventually yield new trends, higher or lower. Patience during these consolidation phases often pays off with low-risk trade entries when support or resistance finally breaks, giving way to a strong rally or selloff.

Good timing is needed to take full advantage of this simple strategy. Enter too early and the range could hold and trigger a reversal. Enter too late and risk escalates because the position will execute well above new support or well below new resistance. It’s often a good idea to reduce timing risk by opening a partial position when the pair breaks out or down and adding to it on the first minor retracement.

Enter Narrow Range Patterns
The pair will often rise or fall into a significant barrier and then go to sleep, printing narrow range price bars that lower volatility and raise apathy levels. Coincidentally, this quiet interface often marks a powerful entry signal for a breakout or breakdown. This strategy enters the position within the narrow range pattern, with a tight stop in place in case of a major reversal

This setup often prints an NR7 bar, which marks the narrowest range price bar of the last seven bars. Originally observed in the U.S. futures markets in the 1950s, this powerful but simple pattern predicts that price bars will expand in a sizable breakout or breakdown. It’s also a low-risk entry because the stop loss can be set very close to the entry price.

The Bottom Line
New and experienced Euro traders can execute three simple but effective strategies that take advantage of repeating price action.
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The PowerShares ETF UUP: An ETF for Dollar Bulls

The PowerShares ETF UUP: An ETF for Dollar Bulls rates percentage

Interested in playing a strong U.S. dollar? You likely aren't alone given the steep upward chart of the PowerShares DB US Dollar Bullish ETF over the last year. That said, it has been trading in a range since hitting a peak in mid-March 2015, but has seen some volatility that could offer some opportunities to traders. That said, is this bullish dollar ETF a good bet right now? Let's have a look. (For more, see: 3 Factors That Drive the U.S. Dollar).

Dollar Rallies: A Brief History
The first thing dollar bears will point out is that rallies in 1974, 1989, 1991, 1993, 2008 and 2010 didn’t last. And they’re even more likely to point out that the huge bull run in the early 1980s also wasn’t sustainable. Using historical trends to help dictate future results is often a good idea but there’s one major difference at play here: not one of the times listed above was deflationary.

When deflation occurs (due to reduced demand), products for goods and services come down making each dollar more valuable because it can buy more. With the value of every dollar increasing, debt becomes more expensive. While the price for that new smartphone or French wine you want might come down, the cost of your debt remains the same. Therefore, people hurry to pay off their debts not wanting to have the extra burden. Governments will also pay off debt. This has a much bigger impact on the value on the dollar. If debts are paid off then there are fewer dollars in the system, which makes the dollar more valuable.

Then you have to take into account the likelihood of the Federal Reserve raising interest rates. When this happens, the value of the dollar increases. It is still possible for the Federal Reserve to become dovish, which would negatively impact the value of the dollar but this isn’t a likely scenario. And you can’t rule out another possibility, which is that the raising of interest rates will be a buy-the-rumor/sell-the-news event. (For more, see: Trade Market Volatility with These ETFs).

Understanding UUP
UUP tracks the performance of the dollar against the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. There's a lot to factor in. Will the Euro further weaken vs. the dollar? The recent words of the European Central Bank head Mario Draghi seem to indicate a change in tone. He said in early November 2015 that "even though domestic demand remains resilient, concerns over growth prospects in emerging markets and other external factors are creating downside risks to the outlook for growth and inflation.” With several upcoming policy meetings on the calendar, we could soon learn how things play out. The ECB could unveil a deposit rate cut or an enhancement to its QE program. Either way it'll indicate to the markets that the central bank is ready to react.

You also have to take into account Japan, which continues its relentless pursuit of monetary stimulus to combat its own deflation, which relates to an aging population that doesn’t consume as much as younger generations. (For more, see: Will the ECB's Quantitative Easing Sink the Euro?).

This is all positive for UUP. However, if you want to see the global economy grow and the world remain intact then you might not want the U.S. dollar to continue its relentless ascent. The biggest threat is that since emerging markets acquired their debts in U.S. dollars, those debts will become more difficult to pay off. This could end up spreading back to the U.S. economy.

As far as stocks go, they don’t perform well in deflationary environments. The dollar should remain strong if there is any type of correction in equities. Some feel deflation is good for the consumer, which is then good for stocks, but that’s only the case for the short term. When deflation strikes, people horde their money to wait for better prices — since prices keep going lower — which isn’t a positive for U.S. stocks, especially in technology and consumer goods.

Fortunately, deflation is a necessary evil. Paying off debts and growing organically again is the correct path to sustainable prosperity, even if it means years of sacrifice and economic pain. (For more, see: How Countries Deal with Debt).

The Bottom Line
While no investment is a guarantee, the U.S. dollar appears to be one of the safest investments out there. It could be a crowded trade, but it’s still a small crowd that has the potential to grow. And the trend is always your friend. Remember how investors thought the rise in equities would end in 2009, 2010, 2011, 2012, 2013 and 2014? UUP comes with an expense ratio of 0.82% but that shouldn’t deter any interested parties from considering an investment.

Dan Moskowitz does not own any shares in UUP.
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9 Tricks Of The Successful Forex Trader

For all of its numbers, charts and ratios, trading is more art than science. Just as in artistic endeavors, there is talent involved, but talent will only take you so far. The best traders hone their skills through practice and discipline. They perform self analysis to see what drives their trades and learn how to keep fear and greed out of the equation. In this article we'll look at nine steps a novice trader can use to perfect his or her craft; for the experts out there, you might just find some tips that will help you make smarter, more profitable trades, too.

TUTORIAL: Beginner's Guide To MetaTrader 4

Step 1. Define your goals and then choose a style of trading that is compatible with those goals. Be sure your personality is a match for the style of trading you choose.

Before you set out on any journey, it is imperative that you have some idea of where your destination is and how you will get there. Consequently, it is imperative that you have clear goals in mind as to what you would like to achieve; you then have to be sure that your trading method is capable of achieving these goals. Each type of trading style requires a different approach and each style has a different risk profile, which requires a different attitude and approach to trade successfully. For example, if you cannot stomach going to sleep with an open position in the market then you might consider day trading . On the other hand, if you have funds that you think will benefit from the appreciation of a trade over a period of some months, then a position trader is what you want to consider becoming. But no matter what style of trading you choose, be sure that your personality fits the style of trading you undertake. A personality mismatch will lead to stress and certain losses. (For more, see Invest With A Thesis.)

Step 2. Choose a broker with whom you feel comfortable but also one who offers a trading platform that is appropriate for your style of trading.

It is important to choose a broker who offers a trading platform that will allow you to do the analysis you require. Choosing a reputable broker is of paramount importance and spending time researching the differences between brokers will be very helpful. You must know each broker's policies and how he or she goes about making a market. For example, trading in the over-the-counter market or spot market is different from trading the exchange-driven markets. In choosing a broker, it is important to read the broker documentation. Know your broker's policies. Also make sure that your broker's trading platform is suitable for the analysis you want to do. For example, if you like to trade off of Fibonacci numbers, be sure the broker's platform can draw Fibonacci lines. A good broker with a poor platform, or a good platform with a poor broker, can be a problem. Make sure you get the best of both. (For related reading, see How To Pay Your Forex Broker.)

Step 3. Choose a methodology and then be consistent in its application.

Before you enter any market as a trader, you need to have some idea of how you will make decisions to execute your trades. You must know what information you will need in order to make the appropriate decision about whether to enter or exit a trade. Some people choose to look at the underlying fundamentals of the company or economy, and then use a chart to determine the best time to execute the trade. Others use technical analysis; as a result they will only use charts to time a trade. Remember that fundamentals drive the trend in the long term, whereas chart patterns may offer trading opportunities in the short term. Whichever methodology you choose, remember to be consistent. And be sure your methodology is adaptive. Your system should keep up with the changing dynamics of a market. (For related reading, see What is the difference between fundamental and technical analysis and Blending Technical And Fundamental Analysis.)

Step 4. Choose a longer time frame for direction analysis and a shorter time frame to time entry or exit.

Many traders get confused because of conflicting information that occurs when looking at charts in different time frames. What shows up as a buying opportunity on a weekly chart could, in fact, show up as a sell signal on an intraday chart. Therefore, if you are taking your basic trading direction from a weekly chart and using a daily chart to time entry, be sure to synchronize the two. In other words, if the weekly chart is giving you a buy signal, wait until the daily chart also confirms a buy signal. Keep your timing in sync.

Step 5. Calculate your expectancy.

Expectancy is the formula you use to determine how reliable your system is. You should go back in time and measure all your trades that were winners versus all your trades that were losers. Then determine how profitable your winning trades were versus how much your losing trades lost.

Take a look at your last 10 trades. If you haven't made actual trades yet, go back on your chart to where your system would have indicated that you should enter and exit a trade. Determine if you would have made a profit or a loss. Write these results down. Total all your winning trades and divide the answer by the number of winning trades you made. Here is the formula:

E= [1+ (W/L)] x P – 1
where:

W = Average Winning Trade
L = Average Losing Trade
P = Percentage Win Ratio
Example:

If you made 10 trades and six of them were winning trades and four were losing trades, your percentage win ratio would be 6/10 or 60%. If your six trades made $2,400, then your average win would be $2,400/6 = $400. If your losses were $1,200, then your average loss would be $1,200/4 = $300. Apply these results to the formula and you get; E= [1+ (400/300)] x 0.6 - 1 = 0.40 or 40%. A positive 40% expectancy means that your system will return you 40 cents per dollar over the long term.

Step 6. Focus on your trades and learn to love small losses.

Once you have funded your account, the most important thing to remember is that your money is at risk. Therefore, your money should not be needed for living or to pay bills etc. Consider your trading money as if it were vacation money. Once the vacation is over your money is spent. Have the same attitude toward trading. This will psychologically prepare you to accept small losses, which is key to managing your risk. By focusing on your trades and accepting small losses rather than constantly counting your equity, you will be much more successful.

Secondly, only leverage your trades to a maximum risk of 2% of your total funds. In other words, if you have $10,000 in your trading account, never let any trade lose more than 2% of the account value, or $200. If your stops are farther away than 2% of your account, trade shorter time frames or decrease the leverage. (For further reading, see Leverage's Double-Edged Sword Need Not Cut Deep.)

Step 7. Build positive feedback loops.

A positive feedback loop is created as a result of a well-executed trade in accordance with your plan. When you plan a trade and then execute it well, you form a positive feedback pattern. Success breeds success, which in turn breeds confidence - especially if the trade is profitable. Even if you take a small loss but do so in accordance with a planned trade, then you will be building a positive feedback loop.

Step 8. Perform weekend analysis.

It is always good to prepare in advance. On the weekend, when the markets are closed, study weekly charts to look for patterns or news that could affect your trade. Perhaps a pattern is making a double top and the pundits and the news are suggesting a market reversal. This is a kind of reflexivity where the pattern could be prompting the pundits while the pundits are reinforcing the pattern. Or the pundits may be telling you that the market is about to explode. Perhaps these are pundits hoping to lure you into the market so that they can sell their positions on increased liquidity. These are the kinds of actions to look for to help you formulate your upcoming trading week. In the cool light of objectivity, you will make your best plans. Wait for your setups and learn to be patient. (For information on determining what the market's telling you, read Listen To The Market, Not Its Pundits.)

If the market does not reach your point of entry, learn to sit on your hands. You might have to wait for the opportunity longer than you anticipated. If you miss a trade, remember that there will always be another. If you have patience and discipline you can become a good trader. (To learn more, see Patience Is A Trader's Virtue.)

Step 9. Keep a printed record.

Keeping a printed record is one of the best learning tools a trader can have. Print out a chart and list all the reasons for the trade, including the fundamentals that sway your decisions. Mark the chart with your entry and your exit points. Make any relevant comments on the chart. File this record so you can refer to it over and over again. Note the emotional reasons for taking action. Did you panic? Were you too greedy? Were you full of anxiety? Note all these feelings on your record. It is only when you can objectify your trades that you will develop the mental control and discipline to execute according to your system instead of your habits.

Bottom Line

The steps above will lead you to a structured approach to trading and in return should help you become a more refined trader. Trading is an art and the only way to become increasingly proficient is through consistent and disciplined practice. Remember the expression: the harder you practice the luckier you'll get.
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Will a Hike in Interest Rates Affect the US Dollar?

Will a Hike in Interest Rates Affect the US Dollar

After a particularly hawkish conclusion from the October 2015 U.S. Federal Reserve meeting, the markets are at least preparing for the real possibility that December 2015 could finally be the time when interest rates see an uptick. Rising rates have far-reaching implications for the U.S. and global economies. Rising interest rates tend to get a bad reputation due to the fact that borrowing and loan costs usually see an increase, thus directly affecting consumers.

From this standpoint, rising rates may make bigger purchases, such as houses or cars, more expensive, but rising rates also signal there is a positive outlook on the economy and growth is expected to continue. This vote of confidence can help spark more corporate spending and hiring down the line as business confidence also rises. While rising interest rates affect many aspects of the economy, how do they affect the value of the U.S. dollar?

Rising Interest Rates Prove to be Bullish Events for Currencies
In terms of government economic reporting, one of the most important and impactful reports on currencies is interest rate decisions. Along with gross domestic product (GDP), trade balance and unemployment figures, interest rate decisions have the ability to cause significant moves in the currency markets. However, when looking at the U.S. dollar’s performance after the Federal Reserve raised rates from 1990 to 2015, rate increases and their correlation to the U.S. dollar have certainly weakened and gone against the traditional phenomena.

In 1994, the Federal Reserve began increasing rates and then watched as the dollar sank through the beginning of 1995. By the time the next round of interest rate hikes came in 1997, the U.S. dollar was beginning a rally that would last through 2001. The last rising rate cycle between 2003 and 2006 was sandwiched between two recessions, and subsequently, the U.S. dollar lost value during that cycle. In short, while rising rates traditionally are very bullish for currencies, due to the fact that investors are able to obtain higher carry interest, the U.S. dollar and federal funds rate increases over the past 25 years have had a nontraditional low correlation.

U.S. Dollar Not Likely to See Major Move During Next Rate Increase
When the Federal Reserve once again enters a rising rate cycle, do not expect the U.S. dollar to sustain a substantial move. For one thing, as mentioned above, U.S. rate increases have had low to negative correlation with the U.S. dollar, and the U.S. dollar has already sustained a massive rally since late 2014. Since late last 2014, the U.S. dollar index has rallied from around $81 to its current $97.59 in November 2015. At one point, the index was above $100. This is a substantial move in the currency markets, as investors have been highly anticipating a rate increase for the past year. Analysts and market pundits have continually reiterated there is a strong likelihood the dollar’s response to a rate increase could be relatively muted.

The Bottom Line
The bottom line is the United States has been in a record low interest rate environment for almost eight years, and the U.S. economy’s sluggish growth actively reflects the current environment. Rising interest rates signal more confidence in the economy, but do not be fooled; rising rates are shown to have less correlation with the U.S. dollar over the past couple of decades. Tie in the fact the U.S. dollar has already seen a massive rally since late 2014 and this leads to the likelihood that investors who are betting on another sustained leg higher in the U.S. dollar rally are likely to be sorely disappointed.
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