Does technical analysis grant higher returns to Forex traders?

Technical analysis is one of the most popular technique used by traders in the ForEx market. One of the most important questions traders desiere to find an answer to is the following: does technical analysis grand higher returns to them? Empirical evidence shows that it grants higher returns than the fundamental analysis at short horizons. These findings have been confirmed to hold in many markets. Many researchers have demonstrated that technical strategies generate excess returns over a long period during the 1970s and 1980s. With a difference. The excess returns generated by simple technical rules based on filters or moving averages had disappeared by the early 1990s, but those granted by more complex rules still persist.
In a study by Neely and Weller (2012) the authors have tested several hypotheses that the technical analysis textbooks has suggested to justify higher income. The researcher ruled out data mining as an explanation for the early profitability of technical rules. Both out-of-sample analysis and adjustments to statistical tests indicate that the returns were true.
Nevertheless, there could be another possible explanation which can justify excess returns, related to the intervention operations undertaken by central banks, when they target for the exchange rate that differs from its fundamental value. These operations may allow traders to gain, if they adopt the right strategy. In particular, assuming that central banks follow a “leaning against the wind” attitude, then exchange rate trends become more predictable and can be detected by technical analysis.
However, research using high-frequency data has shown that the periods of greatest profitability precede central bank interventions. In other words, central banks intervene to stem strong trends in the exchange rate, not the vice versa.
A proliferation of behavioral models can reproduce the trending seen in ForEx markets and show that trading based on technical analysis can be consistently profitable in certain circumstances. The adaptive market hypothesis provides a promising framework in which higher returns can be justified. Behavioral decision rules that depart from the standard paradigm of investors’ rationality, and evolutionary selection mechanisms, could also provide possible explanations.

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A possible recession may be good for cryptocurrencies

Among other things, many analysts think that cryptocurrencies have been developed as a possible response to a lack of faith in the current financial system. A possible recession and a lack of positive sentiment in traditional asset classes could translate in an upward trend for crypto-assets as an alternative investment, particularly considering the recent market value increases in a variety of digital coins.

It could happen that many traditional investors might turn to the dollar as a sanctuary during a crisis, although it is hard to say whether the circumstances of a future recession would allow the dollar to retain its status as the world’s ‘reserve currency’.

In the event of a new recession, within an environment characterized by global currency depreciation and expansionary monetary policy, a ‘flight to cash’ may not be seen as it was in previous recessions, according to some experts. In other words, if the dollar doesn’t retain its strength in the midst of a recession, then Bitcoin could very well go from strength to strength.

Abra Announces Restrictions on cryptos

In the United States, amidst the continued regulatory uncertainty and restrictions, Congressional hearings, and Trump’ comments on cryptos, mobile crypto wallet app Abra was forced to make changes that will inevitably impact its U.S. customers.

The company said they had to make these adjustments “in an effort to continue to be compliant and cooperative with U.S. regulations as they currently exist.”

Crypto Exchanges Are Benefiting from Algorithmic Trading

High frequency trading has been a topic of debate in large part because of a lack of precision and/or understanding by commentators even in traditional markets. HFT can be defined as automation of trading strategies enabled by computers to transact a large number of orders in fractions of a second.

Leveraging algorithms, high frequency traders analyze market conditions to manage risk and execute orders based on predefined trading strategies.

In general, automated market making and arbitrage strategies create greater efficiency in the market by integrating information into prices more quickly and efficiently resulting in narrower bid/offer spreads, improved price discovery, and fewer and more-fleeting instances of price discrepancies across markets when an asset type, such as bitcoin, trades on multiple venues.

A recent article published on shows evidence that the cryptocurrency markets are experiencing all these benefits on the more reputable exchanges as a result of increasing HFT participation. In particular, the article writes that in the past 2.5 years, spreads have generally narrowed and become more stable, and price discrepancies across trading venues have become less dramatic and less frequent.

Understanding leverage in the Forex market

Financial leverage (or leverage) is one of the most used financial instruments in trading, thanks to which a trader buys or sells financial assets (stocks, commodities, currencies) for an amount greater than the capital held and, consequently, benefits from this multiplier effect to increase his earnings. In Forex markets, leverage is used to buy currencies.
Forex brokers makes the capital available to traders who do not initially have, offering the financial leverage service. For example, in the case of 1:50 or leverage one-to-fifty, a trader can perform a transaction to buy a currency for, let’s say, € 10,000, having only a capital of € 200, or 10,000 / 200, which gives a leverage of 50. The remaining € 9,800 are made available by the broker. In the case of a leverage 1:100, the transaction can be made with only € 100, or 10,000 / 100, with a leverage of 100. And so on. The greater the leverage, the lower the initial capital required to carry out an operation.
Suppose now that the euro appreciates + 1.0%, and that a trader is operating with a leverage of 50. He will earn € 100, thus obtaining a final capital of 10,100. If he had not had the leverage offered by the broker, the trader could have invested only € 200, earning only € 2 from the appreciation of the currency. This is exactly the advantage of the leverage effect, which is comparable in all respects to a loan that the broker grants to a customer and which allows him to multiply the gains if the market goes in the desired direction.


It must be said that, as the trader can earn, he can also lose in the same way, if the currency depreciates. Therefore, the leverage allows the trader to gain higher profits, thanks to the broker that gives him the possibility to negotiate large positions, using only a small percentage of the value as an initial deposit but has the side effect that, as profits are enlarged, the same happens for losses. A trader could therefore lose much more than the initial deposit if the market goes wrong.
For this reason, brokers require a margin level, which is an initial deposit needed to keep orders open on the broker account. To open and keep an order open, a trader must have enough liquidity to cover the margin for the entire trading time. The available margin represents the amount of capital that remains to place new orders or cover any negative price movement in open orders.

Central banks launch a new currency war

Officially, the launch of a new wave of ultra-expansionary monetary measures announced by the Federal Reserve and the European Central Bank with their latest forward guidance have the official objective of raising the inflation rate to the target level of 2.0%, since the latest surveys showed a price level still below this threshold.
The Fed will almost certainly cut the fed funds by 25 basis points at the next FOMC meeting (July 31) and many analysts believe another cut of as many points is very likely by the end of the year.
As for the European Central Bank, investors expect a cut in the deposit rate starting next September, and someone of them belives this could already occur at the next meeting (July 25), with a surprise effect. The hypothesis of resuming the Quantitative Easing, the government bond purchase program ceased at the end of last year, is also on the table.
These extraordinary measures, however, seem to hide another objective, which no central bank can admit that it wants to achieve but which in a globalized economy becomes a key driver to be able to compete successfully: the exchange rate. Having a weak currency for the Eurozone and the United States can mean billions of euros / dollars of higher exports, when, since the beginning of the trade war, these have been reduced. So far, in the announcement competition between central banks and those pursuing a more expansionary monetary policy, it was the euro that took advantage, falling to a two-month low against the dollar. Should the ECB prove to be more dovish than expected, the single currency could even fall to a two-year low, at 1.1106.
At that point, the Federal Reserve could also become more aggressive in its expansive monetary policy, taking advantage of the greater space to lower the interest rates it has compared to the ECB, triggering a war for lowering interest rates. The President of the United States, Donald Trump, would surely be happy, since he repeatedly called for the intervention of the central bank to restore competitiveness to the US economy by devaluing the dollar. However, from a global currency war it is possible, and perhaps very likely, that both macroareas could lose.

ForEx & crypto brokers lured by growing African market

Africa may be soon become a very promising market for Forex brokers, as the continent is benefiting from a rising number of retail traders and from a soft regulation.
With 54 countries and 41 currencies, Africa seems to be fit for the Forex industry. African currencies are typically characterized by a high degree of illiquidity and volatility. According to the World Bank, currency imbalances are one of the biggest barriers to the economic and financial development of the continent.
Online trading platforms provided by Forex brokers could reduce the gap for local African currencies, by supplying greater liquidity thanks to modern trading technologies at more competitive prices. Furthermore, cryptocurrencies seems particuarly palatable for countries with illiquid currencies.
The Bank for International Settlements (BIS) showed that the African retail Forex market had a volume of $14 billion exchanged in 2013 which rose to $21 billion in 2016, with these figures to be expected higher in the next couple of years.
Nigeria and South Africa are currently the two largest forex markets on the continent. South Africa, in particular, is attractive for the country’s local regulator – the Financial Services Conduct Authority (FSCA), has relatively low regulatory requirements, which mean lower operational costs and therefore higher revenue for ForEx brokers.

Estimates on retail forex trading in Nigeria show a 350-450 million Naira daily volume in the market, and that this figure is on the rise. Investor interest in Forex has been steadily growing over the last 10 years, and there could be as high as 300,000 retail forex traders in Nigeria of which 25-30% are actively trading in the markets every month.

Based on the net deposit volume reports by Forex trading platform research firm CPattern, Nigerian forex traders on average make deposits of around $514 quarterly, behind South Africa ($742).

Bitcoin rally goes on, Binance GBP ready to enter the market

Bitcoin has rallied sharply at the end of the last week, but the outlook remains bearish with prices holding below key resistance around $11,080.
The most famous cryptocurrency rose from $9,200 to $10,400 in just 40 minutes during the U.S. session last Friday, avoiding a drop below $9,097 put forward by multiple rejections at $10,000 in the previous Asian trading hours.

The latest CFTC probe could heighten regulation fears that have gripped markets over the last few days, making it difficult for BTC bulls to force a break above $11,070. Technical charts are also calling a break below $10,000.

The altcoin market followed the rise of Bitcoin, rising between 5-20%, with Litecoin outperforming all other top 10 crypto by market capitalization. Litecoin rose up +13% at the end of the last week and is currently traded just above the $100 resistance.
For now crypto traders can enjoy the temporary stop-gap offered from periods of consolidation to consider their next move as money continues to flow in and out of the markets.
In the meantime, the Jersey arm of Binance has listed the cryptocurrency exchange’s own British pound-backed stablecoin. The company announced last Friday that Binance GBP (BGBP) is being offered on the fiat-to-crypto platform due to trader demand for more stablecoin options.
A great debate is also heating up on the possible lanuch of Facebok’s digital currency Libra. For the first time in modern history, we are witnessing the emergence of a currency that’s not backed and sponsored by a sovereign government. And for the first time ever, multibillion-dollar corporations are taking the lead in its creation. Certainly a good news for crypto lovers and for those who believe in the decentralization of money.

Buy the rumour and sell the fact: the Brexit case

‘Buying the rumour and selling the fact’ is a Forex market strategy where an exchange rate (e.g. the EURUSD) would move higher due to traders buying because of a rumour they have heard about the economic or political events of a State of which the exchange rate represents. Traders will hear the rumour and begin buying, under the belief that the rumour will eventually turn out to be true and they will make a significant amount of money.
The Brexit tragicomedy supplies a very good example of a situation where this strategy has been used by Forex traders to trade the pound. Traders went short on the GBPUSD (or GBPEUR) on rumours that a ‘no deal’ or a ‘hard Brexit’ could occur, and went long when rumours hinted for a Brexit delay or a ‘soft Brexit’. The agreements signed by Prime Minister Theresa May and the European Commission represent examples where traders went long on the pound. But then, these agreements failed to be backed by the British Parliament.
Let’s look at some concrete examples.
On 10 December 2018, PM Theresa May realizes of the opposition to the EU divorce agreement, which she signed with Brussels a few days earlier, from members of her party and allies, the Northern Irish unionists, regarding the backstop clause and decides to postpone the ratification vote in the Parliament. Traders had already priced in the news for two days and the pound lost, on the day of May’s declaration, -1.24%, to recover +1.16% a few hours later.
On 15 January 2019, the House of Commons rejectes the May agreement with 432 votes against. Also in this case, the result had already been ‘bought’ by traders, who had bet on the rumours of the rejection in the previous three days, only to sell after the vote took place.
On 12-14 March, the House of Commons votes again for three motions submitted by the government on Brexit. The first, which re-proposes the agreement negotiated with the EU, slightly modified with regard to the Irish border clause, is rejected on 12 March with 391 against and 242 in favour. An outcome that, already in the hours before the vote, had seemed inevitable. Rumours of the likely chaos generated by that decision had already been priced in by traders, who had sold off the pound in the late morning.
On 13 March, the Parliament expressed its opinion on the possibility of a ‘no deal’ on the date set for 29 March; with 312 votes in favour and 308 against, the House of Commons approves the amendment which excludes this possibility. May undergoes another humiliation, when unexpectedly the amendment passing the ‘no deal’ in the House of Commons is approved. Traders buy the ‘fact’ and the pound appreciates by +2.02% against the dollar.
Finally, on March 14, the House of Commons approves, with 412 votes in favour and 210 against, an amendment that provides for a postponement of the exit date beyond March 29 to have more time to prepare, once an agreement has been approved with the EU. In chaos, traders return to sell and the pound loses again -0.73%.
On May 24, May announces her resignation as leader of the Conservative Party, for failing to complete the exit from the bloc. Traders sell the ‘fact’, going long on the pound, after buying the resignation rumours in the previous four days, in which the pound had systematically lost against the dollar.

How to make profitable trading with politicians’ statements

The ‘trading of the news’ has always been an interesting technique followed by many traders in their daily business. News, on the other hand, is the basis for any market activity. With the advent of social networks there has been a proliferation of information available to everyone. Even the political world has equipped to promptly issue statements about events or opinions that can immediately reach a huge audience of recipients. Among these are investors.
Evidently, not all the statements of all politicians count to make profitable trading. There are some leaders, however, who are able to act as true market movers with their declarations. Or to represent a phenomenon so well that, whenever they talk, traders react with predetermined strategies, earning money.
The most striking case in recent months is that of Boris Johnson, the frontrunner of the Tories, a well-known brexiteer of the first hour, who, with his anti-European and pro-Brexit positions, has generated a real “Boris Johnson effect” on the pound. The sterling has recently hit a 27-month low against the dollar, also falling against the euro. One of the reasons for this sharp decline is the increase in forex trader’s expectations of a UK exit from the European Union without agreement (no deal), with its supposed disruptive effects on the British economy. Boris Johnson has always declared that London will exit the block ‘whatever it costs’. His strong position was enough to generate a belief among traders, which was then merged into a real ‘rule of thumb’, according to which they go short of sterling whenever Johnson makes statements on Brexit. A simple and effective strategy. An agreement born of the spontaneous market belief, regardless of whether it is right or not. On the other hand, beliefs often count more than reality in financial markets.
Another striking example is represented by the American president Donald Trump and his famous tweets. Artfully designed, almost always published early in the morning, as if it were a ritual, Trump’s invectives against China, the European Union, the excessive price of oil, Russia, etc. have become proverbial. Even among traders. So much so that many traders in the City of London or in Wall Street eagerly await Trump’s early morning tweets to take their market decisions. The oil sell-off following Trump’s fierce words on excessive oil price will remain in the annals of trading. Donald Trump is currently one of the main market movers, from whose lips many traders hang every day. The important thing to do is to be there, behind a screen, at the time of the tweet, possibly avoid making any movement immediately before the expected declaration and sell or buy as soon as possible the asset class targeted by Trump. It is simple. But has also been very rewarding for many traders so far.

How to crete a well-diversified crypto portfolio

A well-diversified portfolio is always the key to obtain a good return on bought assets given a risk level. In other words, is the key to a succesful investment. This principle also holds in the volatile cryptocurrency markets. Which currencies a trader should choose among over 2,000 coins and tokens with varying degrees of risks and characteristics? In order to answer this question the best thing to do is dividing the cryptos in four categories and choose the right percentage of them to create the portfolio.
The first coin that a crypto portfolio should have is Bitcoin, the largest cryptocurrency based on market cap which accounts for over 50% of the entire market. All the other cryptos are highly correlated to Bitcoin’s price movements. Furthermore, Bitcoin is also the default base currency of the cryptocurrency world, because it allows buyers to buy any other altcoins or tokens. This is because local cryptocurrency exchanges usually limit the amount of coins that can be purchased by local fiat money. By holding a share of 25%-30% in Bitcoin, a portfolio is well fenced from market downtrend or uptrend, as Bitcoin is simply the coin which sparks these movements.
The second crypto a trader should have in his portfolio is Ethereum, due to its great popularity. Its blockchain is the most actively developed in the industry, spearheading many innovations. Over 85% of the tokens in existence is built on the Ethereum blockchain, therefore solidifying Ethereum’s position as the most credible blockchain platform currently in the market. Along with Bitcoin, Ethereum is one of the coins that is used as a base currency. Holding Ethereum in a portfolio is important also because the more projects built on Ethereum, the higher the demand for it, which will lead to a price increase. Holding a 15% portion of portfolio in Ethereum is vital in stabilizing it.
The third component of a good crypto portfolio is made by the passive income suppliers, represented by those coins and tokens that help investors to earn money passively. These coins and tokens reward a trader with free coins just by holding on to their current coins. This is also known as interest-bearing coins. Stellar, Bankera and NEO are good examples of this class of cryptos.
Another example of passive coins is ‘free coins’ that a trader can get through airdrops and hard forks. Airdrops is a way for projects to market themselves by giving out free coins. An example could be when a cryptocurrency project issuing their native coins to holders of Ether (ETH). Hard forks, on the other hand, represent coins that are duplicated and issued by a coin that wants to deviate from an existing coin. The most well-known example is Bitcoin Cash, which separated from the main Bitcoin. In that case, holders of the original BTC would automatically get an equivalent amount of BCH for free. By holding a 25% portion of a passive income earner token, a trader is rewarded regularly for keeping faith with the brand.
Finally, a good portfolio should encompass a 35% share of stable coins, the currencies which have a hedging function. Since the cryptocurrency market is volatile, it is useful to mitigate the risk. Stablecoins such as Pax, TrueUSD, USDC, and Tether, tied to fiat currencies and shielded from the volatile prices of the cryptocurrency market, are the best to protect a portfolio and provide a trader with much-needed liquidity. It is important to always keep a share of a portfolio in stablecoins so that a trader can cash-out when needed or simply buy more cryptocurrencies when prices reduce. This action plan will also prevent massive losses in your portfolio.

Bets on a 50bp-cut in fed funds increase

Investors bet more and more on the Fed lowering interest rates this year, as evidenced by the CME FedWatch. The FedWatch calculates the probabilities assigned to a range of target interest rates for all FOMC meetings. The euro has recently depreciated against the dollar, as a result of the performance gap between the United States and the eurozone and after US President Donald Trump has declared that the trade war begins to bring positive results, after the decline in Chinese GDP growth rate.
For the next FOMC (July 31), investors attribute a zero probability that fed funds are in the current range of 225-250 basis points, in line with the value of last week, a probability equal to 72.4% they are in the range of 200-225 basis points, down from 93.6% of the previous week, while the probabilities they are in the range of 175-200 basis points have risen to 27.6% from 6.4% of the previous week.
For the sixth FOMC of the year (18 September), investors attribute a zero probability that rates are in the current range of 225-250 basis points, in line with the value of last week, a probability of 25.6% they are in the range of 200-225 basis points, down from 33.1% of the previous week, a probability of 56.5% they are in the range of 175-200 basis points, compared to 62.7% in the previous week and a probability of 17.8% they are in the range of 150-175 basis points, up from 4.8% of the previous week.
This week, the interval that shows the highest modal value is that of 200-225 basis points only for the next FOMC meeting, while for all the others, the modal value is relative to lower intervals, even that of 150-175 basis points for the last FOMC of the year and for the first three of 2020. Investors do not expect, again, the Fed keeps interest rates unchanged at the current level during 2019 and the probability that interest rates will be cut, meaning that the monetary policy stance becomes more accommodating, has changed, with the probability distribution shifting to a more dovish stance.