What A Fantastic Year 2013!

WD Gann once said, "Everything moves in cycles as a result of the natural law of action and reaction. By a study of the past, I have discovered what cycles repeat in the future." 

How amazing, by studying the historical price data, we look at the statistics and generate the probabilities of how price action repeats itself. After all, thats the most important assumption of technical analysis that "history repeats itself".   

Now, lets take a look at the following chart that I published before in May this year.

Gann was able to forecast the 1929 stock market crash accurately in advance and he shared his secret in his publication that in order to forecast for that particular year, all you need to do is to look at the previous years that end with the same number year. For example, to forecast for 2013, you may study the price action of year 2003, 1993, 1983 and so on. 

Unlike the Dow Jones Industrial Average that has 100 years of history, KLCI only has less than 40 years of data. So I go to this website: Tading Economics to get the required data.

From the data, I see that the year ending with 3 is always a bullish year for Malaysia, the chances are 3 out of 3 bullish. This findings help me in planning for my investment into the stock market this year.

In one of my previous article I mentioned that August to November this year would be volatile and it would be suitable for shorter term trading because I saw that the 1983 chart showed that the second half of that year the price action was zig-zag in a horizontal trend. In addition, there were some important fundamental reasons such as the Fed tappering, our Malaysian Budget and other fundamental reasons that help me to come to that conclusion. 

So if you are wondering whats the market outlook for 2014, let me show you the next chart:

Looking at the chart above, we know that 2014 would be different from 2013, we do not have a clear-cut bullish trend. Investing in the stock market will be more challenging but Im still optimistic about the Malaysian stock market as over the years we have proved that we are less volatile than the regional markets, as we have strong support from the local institutional players.

Below are some thoughts that may affect the market in the near future:

1. Construction and Property Sectors

According to the BMI (Business Monitor International) review on the Malaysian construction sector, they believed there will be some slow down in the construction sector in 2014 due to the falling demand for residential and non-residential buildings. They have maintained their construction growth forecasts for 2013 10.1% and 2014 to be 6.7%.

The property sector will experience some slow down as well due to the cooling measures by our government to curb speculative property activities. I believe this pull back is healthy for our economy as the property market need the necessary consolidation phase to digest the excess supply in the market.

2. Low Interest Rates

With a ultra low interest rate environment globally, the chances of running into a financial crisis is low. Unless there is inflation problem that force the Central bank to raise interest rate, otherwise, we are likely to enjoy this until 2015.

3. Excess Liquidity in the Economy

Ironically, quantitative easing is the biggest driver to drive the financial markets to the ceiling and yet it is currently the biggest risk posed by the financial markets.  In this quantitative easing process the Central Banks from the EU, US, UK and Japan kept pumping in the liquidity into their banking system. In fact JP Morgans Nikolaos Panigirtzoglou, an expert in global monetary flows and liquidity, said the current excess liquidity is the most extreme ever as compared to the past 3 major episodes of excess liquidity namely: 1993-1995, 2001-2006 and 2008-2010. These were periods of strong asset price inflation suggesting that excess liquidity could have been a factor supporting markets at that time.

Since the 1990s the Fed has been playing the money game by pumping in money each time after a financial crisis instead of long term investment in real products and education. The excess liquidity is doing the economy no good as it merely drive up the asset prices and not protecting our purchasing power parity. 

In order to play along with the music, everyone has to dance regardless whether you like to dance or not. Just like in this money printing world, we are losing purchasing power with our fiat money, we are force to invest in this risky asset environment regardless whether we like it or not, as long as we know the Fed is pumping money into the system, we have to participate in the equity and property markets to protect our purchasing power. If we do not dance with the music we will be losing out. 

At the end of the game, we need to win the game beautifully but the problem is how? Because we never know when will the music stop. Right now, keep investing as the music is still playing around the world.

Liquidity in Forex Part No 1 What it Means and Why it is Important

The term "liquidity" is used a lot in trading and finances since it is a vital aspect of market behavior. However, people often use this term very liberally in forex trading often without understanding its exact meaning and the implications of high or low values of this particular property. On this article I want to explain to you what the term "liquidity" is, what it exactly means, its implications within a given instrument and why it is such an important characteristic of the market.

Imagine that we had 20 people standing on a circle with 19 of them holding empty glasses and one of them holding a glass full of water. Now we want to see how much time it will take for the person with the glass to pour it onto the next one and so on until the water reaches him/her again. What we find is that it takes a long time for the water to be exchanged along the full circle because only 2 players are able to participate (the one holding and the one receiving) while all the others have to stay on the sidelines, waiting for their glass of water. Now imagine that we give half of them a glass of water, the process is much faster since the number of active participants has now increased to include everyone, all the people are actually exchanging water all the time.
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Liquidity on the market is nothing else than the "water" in the above example, it is the amount of volume exchanged of a given instrument over a given amount of time. When there is high liquidity there is a lot of volume being exchanged and when there is low liquidity there is little volume being exchanged. When we have a lot of volume people can get in and out of the market easily (since there is always a buyer for every seller and vice versa) while when there is low liquidity the market gets "stuck" as people have to fight to get in or out of their positions. When there is low liquidity you also get harsher price movements since a person holding a position may be forced to drastically change the offering price to match what the other end - which is very scarce - wants. So while under high liquidity exchanges are easy and swift, under low liquidity prices move more erratically since the offered and accepted prices tend to have larger gaps between them. The consequences for the little trader are unpredictability and spread widening while for the large players the consequences are mainly not being able to get in or out of positions due to the lack of available exchange capacity.

Liquidity in the forex market is extremely difficult to read and study since the market has no central exchange but it is handled over a wide variety of banks worldwide in an over-the-counter manner. The volume of a given contract that has been exchanged during a certain period of time therefore becomes hard to read since it depends on the particular provider you are talking about. Even though the market is praised as being extremely liquid and huge, the fact is that this is only be true if you can access to all - or a lot - of liquidity providers (banks). If you limit yourself to just a few you will see that the liquidity you have access to is nowhere near the trillions of dollars people talk about.

When we are going to trade the foreign exchange market, knowing the liquidity levels of the instruments we want to trade is important since currency pairs with higher liquidity tend to be "easier to trade" since they show more inefficiencies characteristic of crowd behavior while instruments with low liquidity tend to show a more random walk much more characteristic of individual investor behavior. Therefore, instruments that are very liquid tend to be easier to exploit using mechanical trading systems while those that dont tend to be much harder to trade. However, as the time frames get bigger liquidity starts to become a less important factor and crowd-based inefficiencies still arise. This is the main reason why you should look for strategies based on larger time frames and longer period indicators when attempting to design systems for illiquid instruments.

On tomorrows post I will discuss the inner aspects of liquidity in the forex market a little bit more, I will discuss some of the currently available literature about the subject in economics and the liquidity characteristics of different currency pairs. If you however would like to learn more about automated trading and how you too can start designing and programming your own systems based on realistic and sound strategies please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !