Donchian channels are a measure of market volatility, much the same as Bollinger bands
and are about as simple as you can get:-

Take the highest period maximum and the lowest period minimum for last n periods, and produce an area. So, a stable price over preceding period will squeeze the Donchian channel, a more volatile price range will expand it.

Never much used in forex trading, and why, when Bollinger bands have superseded this approach…

Download the indicator:- donchian_channels

Despite forecasts for a depreciation of the Dollar, many economists are now saying that the negative housing data released from the United States yesterday may actually bolster the USD.

Let’s state the effect in the simplest possible terms.

Bad news for the US economy, lower jobs, lower GDP, leads to lack of confidence
Which leads to a rush towards safe haven currencies…
Which leads to buying USD – because USD is in itself, considered a safe-haven currency…
So bad US news leads to USD going up.

This rush to a safe haven, any safe haven, after every news announcement is creating some weird effects. It flies in the face of logic, well, simple logic anyway – and is a sign of the present dominance of USD

No, I don’t know of any name for this upsidedown, wrong-way-round, echo, reverb effect – but it certainly ought to have a name…

It’s all about safe havens

The USD appears to be the safest investment, as traders are moving en masse to buy into the greenback.

Some people reckon that (if the entry point is right) currencies such as AUD or NZD might turn out to be the better safe havens during the present financial crisis – maybe… CHF has always had a lot to recommend it. And the irony is that while it certainly isn’t borne out with pair prices at their present levels, as a long-term safe haven, the US dollar might not turn out to be that safe a haven after all…

US Dollar dominance
This effect, whatever it’s called, is certainly a sign of the overwhelming domination of the forex trade by the US dollar. From memory, about 85% of the traded volume in the whole forex market, involves the dollar. Structurally, this is always going to bring problems in practice. Excessive dominance? Not for us to say – the situation is as it is, for as long as it stays that way…

If we were serious economists, interested in fundamental analysis for its own sake, the theory of market movements, etc. we probably ought to be worried – but we’re just common, vulgar forex traders, all we do is operate the system for what it is…

But what to call the actual effect? Any ideas?

Please note – I’ve said USD throughout this – not USA, necessarily…

8 levels, 4 of resistance, 4 of support, are produced, using High, Low and Close data for a preceding time period.

R4 = (H – L) x 1.1 / 2 + C
R3 = (H – L) x 1.1 / 4 + C
R2 = (H – L) x 1.1 / 6 + C
R1 = (H – L) x 1.1 / 12 + C

S1 = C – (H – L) x 1.1 / 12
S2 = C – (H – L) x 1.1 / 6
S3 = C – (H – L) x 1.1 / 4
S4 = C – (H – L) x 1.1 / 2

(There are other recipes for the coefficients to be found…)

Usage
The critical levels are the L3 and L4 levels. The standard method is to expect reversal if the price reaches an L3 level, support or resistance. This is then considered a signal to make a trade against the prevailing trend – keeping the L4 level as a stop-loss.

In addition, or alternatively, crossing an L4 level can be used as a signal for definite breakout – therefore going with the trend. The difficulty here is where to place stops…?

Totally unconvinced of their value, and included for the sake of completeness – if you’ve found a system to make Camarilla pivot points work, do let us know…

The London Interbank Offered Rate is a daily reference rate based on the interest rates at which an institution (ie. a bank) can borrow unsecured funds from other institutions in the London wholesale money (or interbank) market.

It is essentially similar to the US Federal funds rate – the interest rate at which private depository institutions lend balances at the Federal Reserve to other depository institutions.

The British Bankers’ Association publishes the day’s LIBOR at around 12.00 UK time. It’s a weighted average of the deposit rates offered by the participating banks for maturities ranging from overnight to one year. LIBOR is calculated for 10 major currencies.

Forex traders have an interest in LIBOR rates, simply as a gauge of respective currency strengths. (What the LIBOR rate isn’t, is the central bank, ie. Bank of England, Federal Reserve, etc. base interest rate – different thing entirely…)

LIBOR rates fixed? Surely not…
Last year, it was reported that banks might have systematically understated the borrowing costs they reported to LIBOR – this would create the false impression of interbank credit being much cheaper than it actually was, and therefore that the whole banking system was healthier than it actually was. Then the credit crunch hit….

If you’re desperate for more on this exciting topic, you can always download the data here.

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ETFs, exchange-traded funds, grew out of the older style, mutual funds or unit trusts.

Since ETFs trade on the market, investors can use the same trading tools as they can with a conventional stock, for example, limit orders, stop-loss orders, margin/leverage, selling short, and no restriction on lot size.

ETFs retain the valuation feature of a unit trust, which can be purchased/redeemed at the end of each day for its net value – but you’re not limited to trading at the close price. An ETF is continually priced through market trading hours and so intra-day trading becomes possible. (Not something that ever went on with unit trusts or mutual funds).

Commodity ETFs invest in commodities, such as the precious metals and commodity futures. Among the first commodity ETFs were gold exchange-traded funds, which have been widely offered in recent years. There’s also currency ETFs…

Currency ETFs
Rydex launched the first ever currency ETF, called the Euro Currency Trust (NYSE: FXE) in 2005.
See the diagram top right for its recent progress – don’t forget, you can go short, so there’s always ticks to be made. Since then, they’ve launched a series of funds tracking all major currencies under their brand CurrencyShares.

Deutsche Bank offers the EONIA Index on the Frankfurt exchange, which tracks the euro – and also the Sterling and US Dollar Money Market ETFs in London – LSE: XGBP and LSE: XUSD respectively.

Currency ETFs will always suit some investors better than others – if you don’t fancy the cut-and-thrust of spot retail forex trading, they can be good option to explore.

Market Demand
If you’re going to have a market in a commodity, in theory there has to be some end-user demand. Gold has always had the demand from jewellery – the other metals also, but less so. 60% of consumed platinum and palladium goes into auto catalytic converters. For silver, electronics make up the industrial demand.

Over this next year, the safe-haven bullish market forces are going to be balanced by surpluses in the market – the question now is whether investors will be able to keep prices at the same levels and even push on upwards, without demand also driving…

Socialize your Ideas
The slightly frenzied attempts of day-traders to talk up the penny stocks they’ve just loaded into are amusing – for a while. As are the races to get as many off-topic followers as possible, just for the kudos of the numbers. But as soon as I hear bs such as “adding vertical value to a horizontal userbase” that’s when I make my excuses and depart…

Better to impose a little bit of self-discipline, and tweet only when there’s something useful to say – and having said all that, feel free to follow forexperform on Twitter… you’ll get a follow back, seems only fair, having had to read this rant…

Time has passed – the market has moved to reflect new circumstances, what was true then, is now altered… so you change your position and go into a revised risk/reward situation.

If you have a stop-loss placed, then this also needs to be revised to account of the changed situation – most likely you’ll be moving it to your original entry price.

Some will say that you’re now in the position of playing with the broker’s money as if the broker were House at the casino and you can’t lose – not quite true. It’s still your money but you’ve locked in some profit. You can’t lose on your original position, having adjusted the stop – you can lose on the potential of your position as it stands. But you are a winner – now is the time to give yourself a pat on the back.

The losing trades
What if you’ve lost? – you never do the same thing with losers, just to try to claw back on the vanishing pips – the market might suddenly reverse etc. etc… Never change a stop on a losing trade, unless you’re getting out entirely.

Result?
The result of scaling your winning trades efficiently is an increased pip profit per trade – while at the same time your losses should remain the same. There will always be losses, but there’s an edge here.

How do the CFD providers make their money? There’s the spread, and they’re doing a lot of order-matching behind the scenes, while hedging off any discrepancy.

Bid/Ask Spread
As with traditional online retail share dealing and forex, CFD prices are quoted as a bid/offer – (the price you sell at, versus the price you buy at).

Margin/Leverage trading
Yes, there’s margin involved – boosting returns and losses – but not the 1:400 leverage of the standard forex market.

My own view is that CFDs are to be avoided, on stocks, equities, anything and everything – it’s one small step away from spread betting and if you want to end up like those dumbasses who spreadbet on the FTSE opening every morning, fine, go ahead…

One other point – the basic position is that CFD trading in the forex market is not legal if conducted in the USA – different jurisdictions may vary.

And here’s a nice enough example. GPB/USD 30-min chart – the currency pair becoming range-bound, candlesticks shortening and then breakout – here, to the downside.

Bollinger bands are a measure of market volatility – in simple terms, when there’s a trend on, or when the price is zigzagging with no clear outcome, the upper and lower bands expand away from each other. When the price settles down (becomes range-bound) the bands begin to come together and that’s the Bollinger squeeze. It’s as if there’s a constriction and the price has to pop out – one way or the other.

How to take advantage of a Bollinger Squeeze
We know there’s an increased probability of imminent breakout – because that’s the way markets, forex, stocks, whatever, tend to work – but which way? That’s the point – it’s not possible to say, just by looking at the Bollinger squeeze and without other information, whether the breakout is going to be bullish or bearish.

So, if your trading platform allows, you might investigate pending, conditional, orders – covering either option. OCO orders – one cancels other can also be the way to go, if you have the option – two orders, where if one is filled, the other order is cancelled. You’ll also be keeping an even closer eye on possible market reaction to news events.

When to pull the trigger?
Of course, the other question is how long the squeeze is going to last before there’s a breakout. Don’t just guess on a trade and click one off immediately, just because you’ve seen the Bollinger squeeze come on. It may be 5 time periods, it may be 30.

Cause and Effect
Indeed, just because there’s a squeeze, there’s no absolute proof there’s going to be a breakout, ever - that would be falling into the trap of thinking that an indicator creates a market – it’s the other way round.

There’s more information about Bollinger bands, and if you ever feel like going through the theory attached, it’s all here.