I have long believed that it is a fundamental law of the markets that trading strategies do not work. At least not in the long run. This is based on that fact that if they did, then eventually everyone would use the winning strategy which would make everyone trade the same way and cause the market to come to a standstill due to a lack of buyers or sellers.

In the short run, however they do work and this can of course be seen empirically. Generally, a trading strategy takes advantage of a little known or subtle anomaly in the market, that when discovered soon vanishes. (This is why all those amazing performance records of trading bots mean absolutely nothing)

Now if you get lucky you will find a strategy that lasts long enough for you to make a good amount of money and then leave the market while you are still on top, but I think we all know how often that happens. For long term profits a trading strategy isn’t helpful. They all take advantage of an aspect of the market that is only temporary.

However, a trading system is something that no trader should be without. What’s the difference? Well, a trading strategy tells you when to buy or sell what pair, while a system tells you how to act on a trade once you enter it. It’s the difference between what to do and how to do it.

There is no sure fire way of knowing what to do in the Forex market but, a good system will tell you how to trade the right way every time.

Last week I wrote that I expected a large drop in AUDUSD if the RBA signaled that they would be holding rates steady. Well they did, and boy did we get a drop. The pair has fallen down to the 0.8800 level. The 0.8600 level still stands as a strong support level, and I believe that the week’s trend of a falling AUDUSD will continue into tomorrow.

As far as tomorrow’s unemployment rate goes, Yohay Elam of ForexCrunch.com writes that “a drop up to 9.5% or a rise to 9.9% won’t make a difference”, and I agree with him. There is a good chance that this move will bring AUDUSD down to its support near 0.8600. This would be much sooner than I expected, but the market doesn’t really care what I think.

Whether USD will continue to gain strength into next week, is a hard call to make at this point. But, generally if we have a strong negative week, the next week opens to the upside, so I would not want to be in an AUDUSD short over the weekend. Of course I wouldn’t want to be long either.

Next week brings some very important news with it. On Tuesday we will see if the RBA will be hiking rates for the third consecutive time. There will be US unemployment data and a rate statement by the ECB. While the volume of data is not very high the importance of it is.

The market is slowly falling into risk aversion and it will have little reason to change course unless we get some new information.

Monday 5/3

No important news scheduled.

Tuesday 5/4

4:30 GMT Australian Interest Rate Decision

The expectation is for the RBA to hold, but this will be a close one. Don’t be surprised if they raise rates again. If they do it would be a short term gain for AUD, since there is a relatively high level of uncertainty about the decision. Watch the statement though for signs of the end of the rate hikes.

Wednesday 5/5

No important news scheduled.

Thursday 5/6

12:30 GMT ECB Interest Rate Statement

The ECB will continue to hold here, and for the foreseeable future as well. Trichet has little to no power over the Greece situation at this point, so his only option is to stand back and watch. Don’t expect much to come out of the statement.

Friday 5/7

12:30 GMT US Unemployment Rate

The unemployment rate in the US has stood at 9.7% for three months now. A lot of the employment strength has been due to seasonal adjustments by the BLS. The current down trend in unemployment could be tested here

AUDUSD remains constrained by its lower highs, a trend that began this month. There is still support just above the 0.9100 level; however the price action suggests that this support will be broken. The pair has been trading in a large range over the last six months. The lack of interest rate movement out of the Fed will likely contain the pair to this range.

The return to the bottom of the range around 0.8600 will most likely be triggered by a signal from the RBA that they will be holding rates steady. As long as they continue on their rate hiking cycle, the pair should be bolstered to the top of the range. There is strong profit potential for an AUDUSD sell, this would be a long term trade, with a larger stop loss above the recent highs around 0.9370 that would target a return to the 0.8600 level. This trade should be exited if either the Fed or RBA signal imminent rate hikes.

Down Trending Highs In AUDUSD

The market has given back any gains on risk aversion that it has gained this month. AUDUSD has broken through this month’s support line around 0.9160 and look to be heading down to at least 0.9060. EURUSD had been hit the hardest by the lack of interest in risk as the pair is almost unchanged over a year.  Even after today’s strong showing in the consumer confidence numbers, now at their highest levels in over a year and a half, the market refused to buy into risk.

Part of the reason the market’s risk appetite refuses to increase is the still depressed levels of interest rates in the US. The Fed has slowed down their liquidity injections greatly, but they continue to use the phrase “an extended period of time” when referring to how long rates will remain depressed. Will increased rates in the US raise risk appetite levels beyond what they are here?  In the long run it would signal the end to lose monetary policy, which would increase returns on risky assets, which would increase the appetite for risk.

We shall see tomorrow, if the Fed has begun to look in the direction of increased interest rates. But this would be unexpected at this time. There is some dissention within the Fed, but it does not look like enough to raise rates this year. Be on the lookout if the Fed removes their now infamous “an extended period of time” phrase, we could see a strong move toward risk appetite.

This week was a bit mixed and overall subdued for risk appetite. Despite the strong levels in equities, only USDJPY made strong moves toward risk appetite. The dollar was surprisingly strong when you considered the movements in other related markets.  There is a small amount of data to be released next week, but the releases are of a high level of significance.

Monday 4/26

No important news scheduled.

Tuesday 4/27

14:00 GMT US Consumer Confidence

We would have to see a reading approaching 60 for this to have a strong impact. For reference the survey reads at around 100 during good economic times, and hasn’t registered above 55 for almost a year and a half.

Wednesday 4/28

18:15 GMT Fed Funds Rate

The last release really solidified the Fed’s position to hold steady for the rest of the year. There was one dissenter in the last two releases, Hoeing, who wanted to begin raising rates. It is possible that he has convinced others to join him, but unlikely that he will get enough support to do it this time. However another dissenter could greatly increase the market’s perspective on future rate increases, strengthening the dollar.

21:00 GMT New Zealand Central Bank Rate

The RBA has stated that they expect to raise rates in the middle of the year. This sentiment will most likely be reiterated, as they hold rates steady. However if they back down from this stance expect NZD to weaken on the news. NZD may also get a small round of buying if they confirm their position, but not much.

Thursday 4/29

No important news scheduled

Friday 4/30

12:30 GMT Canadian and US GDP

The Canadian release is a final release so there should be little surprises there. The US release is the advance one so it could easily surprise the market, so be extra cautious.

With the release of their monetary policy statement today, Canada has entered a transition phase in-between the current lose money policy and the imminent tightening policy. Looking at the remarks in their statement, I do not believe that we will see a rate hike in their next decision on June 1^st. However, there will be rate hikes to come after that.

Being the forward looking mechanism that it is, the market has already begun to price in these rate hikes. Just how much farther will USDCAD fall based on these rate hikes alone?

Don’t forget that right now it seems like the Fed will not be hiking rates until next year so we could see a good six months of significant yield advantage of CAD over USD, if not longer. So, these rate hikes will certainly give a downward pressure on the pair. A return to the pairs low around 0.9000 seems all but certain at this point. And, it looks like the parity mark will switch from support to resistance during this period.

Overall USDCAD has the makings of a strong sell, although a pullback to 1.1000 is highly likely. Long term there is strong resistance above 1.3000, that has been tested and held sever times in the last few years. CAD will also be strengthened by the rising price in oil, which is inching ever closer back to $100.

There is a tactic that every trader out there has tried, and it never works. Has this ever happened to you? You come up with a new trading strategy, only to find that it proves to be unprofitable. So you have the idea of reversing the signals to produce winning trades.  Surely this would yield a winning strategy, but it doesn’t. There are two main reasons why this does not work.

The first reason applies to those strategies that lose slowly. They have what I like to refer to as a leak. This leak is problem number one, the market is not a zero sum game; it is a negative sum game. In other words if you add up all of the winnings and losses in the market they would not completely equal each other, they would add up to a loss, since each transaction has some cost associated with it. For almost all retail traders this cost is the spread.  Most traders are capable of creating a system that takes advantage of anomalies in the market to squeeze out a few pips per trade on average. The problem is that the spread is greater than the average profit, so simply reversing the signal would yield not profit since the cost of trading is independent of the direction traded.

The second reason is from trades that lose most of their equity in a small portion of their trades, such as the death trade inherent in a martingale system. These signals cannot be reversed to produce a winning strategy because of the way that equity grows. Your rare large wins will not be equal in magnitude to your large losses of the original strategy, your equity has fallen and with it your ability to make profit. So, your rare but large wins will not be able to compensate for your consistent losses.

So, how can this help you be a better trader? By identifying these two major sources of losses, you can better avoid them. First, to reduce the impact of spread on your trading, find a broker with consistently low spreads. Second, protect your equity at all times with an emergency stop loss, remember you can close the trade before the stop loss it hit, but keep it there to protect your capacity for profit.

The market is not looking promising for risk appetite this week. Equities broke down below 1200 on Friday, and they remained under that mark in todays trading. The talk is that the SEC’s investigation into Goldman Sachs is what is causing this risk aversion, that may be the case but this type of news rarely has a lasting impact in the market, I believe that there is still hope for risk appetite this week.

Despite the poor showing in the equities market, AUDUSD made back half of its losses that it incurred since last Thursday. The pair still has a bit of strength left in it and looks to have set a course for 0.9285.  EURUSD has followed the same general movement as AUDUSD but a bit more subdued, although any short term gains in EURUSD would have a hard time breaking above 1.3515.

The one pair that remained intertwined in the equity price action was USDCAD. The pair has held on to its gains from last week. Partially to blame is its proximity to parity, which always seem to make USDCAD act outside of the normal correlations. The other, perhaps more important, reason for the relative strength of USD against CAD is the movement in oil which has fallen to just above 80 dollar a barrel in the last few trading days.

The long term trend is still in favor of risk appetite however, it looks like the most likely scenario is for the market to take a breather in the short run. This is only natural when you look at the price action since February.

AUDJPY, USDJPY and CADJPY are all looking like strong buys at this point. Even GBPJPY is beginning to break above its downtrend. And while EURJPY is lagging behind the bunch, the biggest hindrance in the carry trade looks to be AUDUSD. Without AUDUSD making new highs, it is unlikely that the yen pair can continue their upward momentum.

The movement in the S&P has been favorable to the carry trade. It moved sideways today and well above 1200. Expect a test of the 1200 level before we see some significant gains. If 1200 is tested and holds, look for opportunities in the carry trade, especially in AUDJPY.

Fundamentally, there is not much behind this increase in risk appetite. Sure, the unemployment situation in the US is showing improvement, and the Greece situation is moving closer toward resolution, but this is not exactly recent news.

Tomorrow will be telling for what to expect in the near term. The most positive scenario is a test and validation of the 1200 support level in the S&P, which would signal a continuation of the risk appetite.