Would I make a good forex trader?

One of the most frequent questions I am asked is “Would I make a good forex trader”. Without knowing who you are, that is a bit difficult for me to answer. The question is: Do you know who you are?

What is the attraction of trading forex? The dreams of financial independence? The lifestyle you will be able to enjoy? The thrill of the risk?

Let us take the lifestyle. Now, you are probably thinking right now of being on a beach somewhere enjoying the sun while your positions just roll the profits up. Let us hope that you find a beach on the same longitude as London, because that is where most of the action takes place and so it is most wise to be around during the European session. In other words, if you are on the west coast of the U.S., you had better get used to becoming a nighthawk. Can you handle that? Can you sleep while you have positions running or do you need to be in front of the screen continuously?

What about your psychological and emotional makeup? Most people I interview claim they are not emotional. Have you ever lost a large denomination bank note or bill? How did that feel? Did you just say “Oh well, that’s the risk of carrying cash around, easy come, easy go”? I don’t think so. Can you control fear and greed, because the great majority cannot and it is fear and greed that move the markets.

Can you afford to trade? Again, many believe that they can earn $100,000 per annum consistently with $5,000 start capital. Not impossible, but highly improbable. In a future newsletter, I will explain how you can make it big even if you do not have the initial capital. If losing this $5,000 will change your life style adversely, then you really ought to leave trading alone. People have been known to do drastic things after losing their wealth!

If you have the money, the emotional coolness and can handle the lifestyle, there is a very important ingredient: skill and to a large degree, a good education. Math and probability are the friends of a good trader and even if you trade technically, you will still need to take the macroeconomic view into account.

Some (very few) people are ‘lucky’ and can make money without any apparent skill. I doubt that they can do this consistently, year in, year out. You have to understand the market you are trading.

So (and here is the commercial plug, folks!), you can get most of the answers by seeking guidance. There is so much information out there on how to trade, that you need to be able to cut it down to the essentials. You also need to be able to look into a mirror and say ‘I know who I am’. You need discipline to trade, and self-discipline is the hardest of all. Therefore, you need someone to hold you to your rules. I hope that you get the picture!     

Fundamental Analysis

Are the Chinese supporting the dollar?

After hitting some lows recently, the U.S. Dollar seems to have come back a little in the opening days of 2005. Is it because the Chinese are ready to support the Greenback if the Fed doesn’t? And Why?

The reason why is quite simple: The Chinese have tied their own currency, the renminbi, to the Dollar, so by supporting the Dollar, they are holding their own currency up. A little perversely perhaps, they’re doing this because they don’t want to REVALUE the Renmimbi. A stronger Renmimbi will badly affect economic growth in China, which they require to be over 8% per annum to be able to find jobs for the 25-30 million people that annually move from the country to the towns to find employment.

China, through the Bank of China have bought three times the amount of Dollars in 2004 compared to previous years. China’s reserves are 80% in USD, and in October they bought $22.4 billion (Heaven knows where the Dollar would be without that!!!)

It is considered that the Remnimbi is undervalued by 15-25 pct (source: Danske Bank, Denmark). This means that there is a very large import of capital into China (balanced in part by the Chinese buying up companies in the U.S.). Therefore, if the Dollars falls any further, more capital would flow to China causing economic growth to spiral out of control. So China is trying to hold the status quo.

Will a revaluation of the Renmimbi come? Possibly in the second half of 2005, perhaps with 5%.

(One day, the Chinese currency will hopefully become fully convertible and allowed to float against the Dollar. If that day comes, the forex market will explode in terms of volume, mark my words!)