FREE Fed Primer on Financial Derivatives

Here is a guide about financial derivatives from the Federal Bank of Boston.

From hereon, I will post on this blog, any information that, by way of knowledge,  can empower the budding investor.

The PDF is a free download straight from the Boston Fed website

Click here to view the PDF

The Danger of Derivatives

In the program "On the Money" from ANC, there was a segment where a representative from one of the local banks was talking about derivatives.

I found the segment disconcerting for two reasons:

1. The program is supposed to be catering to new or potential investors who have none, to little experience in the financial market. Yet the segment host and guest were talking back and forth in language that I am sure would leave their newbie audience with a glazed look in their eyes. A proper explanation that a layman could understand was certainly called for, but it never came.

2. Derivatives were central to the financial crisis in the US that took down institutions like the Lehman Brothers. In my previous post, I mentioned the need for traders and non institutional investors to watch the movie "Inside Job". This is why the way derivatives were once again being promoted gave me some "deja vu" vibes and drove me to write this post.

Clearly, there is a strong need for potential investors and traders to empower themselves with knowledge about the financial market in order to avoid being subjected to terms and instruments that sound impressive, but for all the wrong reasons. At least for those in the know.

In fact the Wall Street Journal mentioned in an article published in mid January 2014 that banks are putting themselves in danger by dealing in derivatives again. The article admonishes those concerned to think back to meltdown of the US Financial system and to remember, the big role derivatives played in that crisis.

Go here to read the article at WSJ

Another, more recent article on the World Finance website asks whether there are still risks in derivatives in the Post Lehman period.

Here is the link to the article

Anyone planning to deal with derivatives ought to read these articles in order for them to properly assess their trading options.

And PLEASE, watch the "Inside Job". Its almost certain that those newbies who watch this will experience a paradigm shift that will serve them in good stead in their future forays into the wild world of finance.

INSIDE JOB - Required watching for non institutional financial traders

Despite the existence of many urban myths, including many "big brother" scenarios, there are many things that are in fact, plainly and simply, JUST FACTS.

The movie "Inside Job" is a documentary that precisely shows the true facts leading up to the financial crisis of 2008. It should be required watching for any non-institutional trader before even attempting to try the wild frontier of financial trading.

Keep in mind while watching, that while the financial instruments referenced in the movie are substantial in themselves, the forex market, with more than $4 TRILLION moving DAILY is one, ripe with opportunities to rip off the unsuspecting trader.

It's an eye opener to the sheer greed that exists in the markets where the players just have no sense of ethics at all.

Make no mistake about it. They WILL eat you alive.

Here's the IMDB page for the movie

And the official site for the movie

Twisted advice about the NZD

It doesn't take much brains to figure out why the NZD tanked against the USD after the ISM data.

Seems there are still dozens born every minute because many so called "experts" in forex have been exhorting people to go long NZD for a week now and many did in fact go long.

So here they are stop hunting, hoping to make money off the gullible traders.

Given the high interest rate, I might choose to go long just about now at the .82965 level.

Somehow I have this feeling that the USD is about to pull a surprise.

But that's just me. I trade price action and I don't make any claims about being an expert. Not by a long shot.

All the advice I can give is simply this. Think carefully before pursuing the experts advice. 

Curious NZD behavior

The Global Dairy Trade event today showed a -0.6% decrease in milk prices.

While this was expected to (once again!) hit the NZD, the curious thing is that it did weaken, then it rapidly moved back up, even surpassing the levels prior to data release.

I believe the explanation for this is the fact that many who follow the NZD milk trade know that the price of dairy is naturally hedged and if historical data is any indication, in comparison to prices this time last year, the prices are relatively better. Those who trade NZD seriously are without a doubt, aware of this fact.

Hence, the logical conclusion is that the rapid movement just a few minutes ago is merely the attempt by some well funded traders to profit on the initial volatility that precedes and accompanies data release.

Anyway, those who wish to learn more about this milk price hedge can read about here

George Soros betting on stock market crash

It is a bit of news that those in the know are dreading.

After what happened to the Bank of England after Soros made his move before, traders tend to watch out for what he will do next.

Well before the markets closed last week, August 15, 2014, Soros made his move, putting $2 billion on a move that anticipates a stock market crash.

Scary news indeed, read about it here

Let's be careful out there.

Going long NZD

Fonterra dropped milk prices today to their lowest levels in several years. As expected, this induced a drop in the NZD. 

Personally I find these levels über attractive and could form a basis for a lucrative carry trade.

Itching to go long

I still have several Aussie longs that haven't turned into profit yet, but I didn't mind before because it was earning interest anyway.

So I was pretty much fine with it until a couple of days ago when the RBNZ or Reserve Bank of New Zealand added an anticipated 25 basis points making the NZD almost 30% more profitable as far as interest is concerned. Moreover, as per my post the other day, the NZD is actually dropping (go figure) so its in what appears to be a nice level to go long

Consequently, since then, I have been itching to go long on the NZD and every time I see a bullish candle on the charts I worry that it might bounce already. Nothing I can do though except to wait with my finger on the trigger with only 3 1/2 hours to market close.

Strange NZD behavior

The RBNZ came out with a decision to raise the NZD cash rate by 25 points to 3.5 from 3.25.

This decision was largely expected though normally, even in this case, the currency tends to rise substantially.

Strangely enough, the NZD not only refused to rise, but even went down substantially.

Explanations of several forex columnists revolved around the statement of an RBNZ governor that this would be the last raise for some time. While this statement is a bit of a let down, this point of  view ignores the fact that the NZDD has the highest cash rate at the moment.

The AUD has a rate of 2.5 right now so the NZD has a significantly higher rate. Sure its a far cry from the 7% in 2008 for the AUD, but 3.5 for the NZD is certainly nothing to sneeze at.

Anyway regardless of this curious behavior, I am happily trying to go long on the NZD right now in an effort to use it as a replacement / supplement for my AUD in so far as my carry trades are concerned.

A Brave New World

Its been quite a long while since my last post. Many things have happened both in the FX world and in mine so there wasn't that much time to post.

I haven't stopped trading though and because of my disgust at the brazen market manipulation, I resorted to scalping. This was a decision that proved to be a wise one because the market has been quite volatile.

Thankfully, there was a bit of a crackdown on market manipulators which can be seen in the smaller swings in currencies.

However, evidence still points to manipulators particularly when economic data is expected. Good data has sent a currency plunging which simply shows that a new strategy of trading forex is needed if one is to survive.

As the post title says, its a brave new world of trading and in truth, it is, now more than ever, something that only the brave should do.