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3e1ad38c45c1-0 | how many put options are bought relative to call options. The formula is very simple to calculate—take the volume for puts and divide by the volume for calls. (For anyone who is not familiar with options, buying a put is making a bet that the market is going to fall, and buying a call is making a bet that the market is... | Page 1339 |
ff8f096baf60-0 | 50,000/100,000, or 0.5. If there are 125,000 puts sold and 85,000 calls, the ratio is 1.47. There are three main PC ratios that are generated throughout the day: the equity PC ratio, the index PC ratio, and the combined equity/index PC ratio. The equity PC ratio is generally very low, which reflects a retail crowd that... | Page 1340 |
b966ba89e379-0 | tendency to favor the long side (more call buying). The index PC ratio is usually very high (more put buying), which reflects an institutional mindset that wants to stay hedged against any unexpected move lower. The combined equity/index PC ratio reflects the behavior of both of these groups and gives a trader the best... | Page 1341 |
ad4500d3c982-0 | and, more important, where they are placing their bets. It is this combined equity/index PC ratio that I watch during the trading day. To illustrate how I use this indicator, let’s assume that the market is made up of exactly 100 participants. Let’s further assume that all 100 of these people are bearish on the markets... | Page 1342 |
39fd08d8c002-0 | feeling, they have established short positions in stocks, ETFs, and index futures, as well as through the buying of puts. With all 100 market participants bearish and now short, a very interesting turn of events takes place—there is nobody left to sell. With nobody left to sell, the markets don’t have any downward pres... | Page 1343 |
b54ff8b2594e-0 | first set of stop orders placed in the market by the 100 market participants who are short. Within any given group of traders, some will be using tight stops, some medium stops, and some wide stops. The group of tight stops gets hit first, and this generates fresh buying pressure in the form of short covering that driv... | Page 1344 |
ad3c79f4cffc-0 | series of stops kicks off yet another short-covering spree, which, once triggered, drives the markets even higher into the next range of stops, and so on until all the stops are taken out. At this point, the 100 market participants get bullish, and they start buying stocks and index futures, as well as call options. On... | Page 1345 |
aea340f36df7-0 | establish their positions, a very curious thing takes place—there is nobody left to buy. With nobody left to buy, the markets begin to drift lower and take out the first set of tight stops, which in turn creates enough selling pressure to drive the markets down to the next set of stops, and so forth. It’s a vicious cy... | Page 1346 |
2c6742d8dbab-0 | simplified scenario, and in the real world, not every single market participant is going to be bullish or bearish at exactly the same time. However, the amount and intensity of bullish and bearish bias does fluctuate regularly, and this shift in attitude causes markets to move in a fashion related to the oversimplified... | Page 1347 |
edd3c6434832-0 | the PC ratio: If the combined equity/index PC ratio gets over 1.0 intraday, I will ignore all short setups and start looking at long setups. A PC ratio of over 1.0 represents extreme | Page 1348 |
7585349e41ed-0 | bearishness and put buying, and, as a result of the scenario just described, places a floor in the markets. It’s not an immediate floor. When the ratio goes to 1.0, the markets don’t suddenly stop declining and then immediately rally. It’s a process, and a visible support level does take shape because of the simple fac... | Page 1349 |
8edb156583e7-0 | stops sitting overhead, just waiting to be taken out. These 1.0 readings usually happen when the markets have fallen for a number of days in a row, or when bad earnings or economic data hit the tape, suddenly infecting many market participants with a bearish outlook. In fact, many times a market will continue falling u... | Page 1350 |
f934b07a6746-0 | which brings me to my next rule: If the combined PC ratio falls under 0.60 intraday, I will ignore all long setups and start looking at short setups. A PC ratio of under 0.60 represents extreme call | Page 1351 |
346e81f9cc85-0 | buying and puts a ceiling on the markets. This represents a scenario in which there are too many bulls and very few people left to buy. Now there are lots of sell stops sitting beneath the current levels, just waiting to be hit. This usually happens after the markets have rallied for a number of days in a row, or after... | Page 1352 |
6d31658049fa-0 | who have missed the move start chasing it in the fear of being left behind. In fact, many times a market will continue rallying until the PC ratio gets under 0.60. Figure 6.9 is a 15-minute chart that shows the mini- sized Dow overlaid on top of the equity/index PC ratio. On February 22, 2005, the PC ratio stayed low ... | Page 1353 |
74ac1dfcefbe-0 | This represents a bullish outlook and the buying of stocks, index futures, and calls. This placed a lot of stops below the markets, and the Dow subsequently sold off over 120 points to clear them out. On February 23, the PC ratio spent a little time over 1.0, which represents a bearish outlook, the establishment of sho... | Page 1354 |
bc6a05a174b1-0 | many stops above the market. This was enough to kick-start a modest rally into the close, as the overhead stops provided the fuel for the market rally. On February 24, the PC worked itself to an extreme high reading, while the markets gapped down and stayed under pressure early in the session. However, with so many peo... | Page 1355 |
a733e4cc7fae-0 | sitting above the markets, the market had little choice but to rally. On February 25, the PC started the day low but quickly rallied and stayed near 0.80 for most of the day. On February 28, the PC started off low and spent nearly an hour under 0.60. This means that everyone was excited and was buying calls because of ... | Page 1356 |
07b9b00ddd80-0 | market resulting from all the fresh long positions, the markets drifted lower and took them out. | Page 1357 |
3ee6aee991e5-0 | Figure 6.9 To reiterate, the main thing I’m looking for in the PC ratio is whether or not it is at an extreme range. This indicator doesn’t spend a lot of time in the extreme ranges, but they are hit often enough to have an impact on the markets. What about when the PC is not generating an extreme | Page 1359 |
6a7b984cca7a-0 | reading? The PC actually spends a lot of time in what I call “neutral” territory. This is between 0.70 and 0.90. During these periods, the PC is generally not a factor in my trading decisions. However, there is another aspect of the PC that I will watch during the day, and that is the “trend” of the PC. And this brings... | Page 1360 |
11056e1cf283-0 | next rule: If the market is rallying, I want to see the PC rallying to confirm the move. If the market is falling, I want to see the PC falling to confirm the move. If the PC is rallying, this means that more people are | Page 1361 |
30b9e8904555-0 | getting bearish, and they are shorting stock, shorting indexes, and buying puts. This means that people don’t believe in the rally, and they are using the strength to establish short positions. Little do they know that their act of shorting merely adds fuel to the next leg higher, as the market now has a series of stop... | Page 1362 |
6f027ed5cca1-0 | the market is rallying and the PC is falling, this is because people believe in the rally and are chasing it—a sign that it has run its course. Naturally, the opposite is also true. If the market is falling and the PC is falling, this means that more people are bullish, and they are using the market weakness to buy st... | Page 1363 |
f372f83a69d2-0 | continue on its downward path in the form of new sell orders placed below the market. If the market is falling and the PC is rallying, this means that people are getting scared and are chasing the market lower—a sign that the decline is about to end (see Figure 6.10 ). 1. On March 29, 2005, the mini-sized Dow futures ... | Page 1364 |
c738a088fca5-0 | and try to push lower. 2. The PC rallies as people scramble to establish short positions and buy puts. 3. This increases put buying. Even though it doesn’t push the PC above 1.0, it is enough to | Page 1365 |
638916ce199e-0 | get the markets to reverse course and take out the overhead stop orders. 4. Traders view this rally in the YM as a positive thing, and they start buying calls as the market pulls back. This call buying intensifies, driving the PC ratio | Page 1366 |
bbf2d75e6b29-0 | to under 0.65. 5. With the aggressive call buying, the YM drifts lower for a few hours and then cracks, falling more than 120 points. 6. With the decline, traders start to worry that they are going to miss the down move, and | Page 1367 |
c1b30a759942-0 | they start shorting stock and buying puts. This drives the PC ratio to its highs on the day. 7. Although the markets don’t rally into the close, they stabilize, as a high PC ratio starts to establish a floor in the markets. | Page 1368 |
b83692002da9-0 | Figure 6.11 shows the markets the next day. With the markets closing near their lows on March 29, people get bearish the next morning, and on the gap up, they start shorting aggressively and buying puts for the “inevitable” move lower. The PC ratio gets very high as the traders race to get positioned on the short side... | Page 1369 |
4edfdb303e94-0 | higher than the previous day’s close. I do want to point out that I largely discount the PC ratio until after 10:00 a.m. EST. There are a lot of listed stocks that take time to get opened, and a lot of overnight option orders that take time to get executed. This causes a lot of erratic movement in the PC ratio. Also, I... | Page 1370 |
339c1fa87642-0 | options expiration day, as it tends to get out of whack because of all the specific options-related activity. The PC ratio is a valuable intraday trading tool. As of this writing, there are many data feeds that do not carry this indicator. On TradeStation, you have to be permissioned for “opra” in order to receive the ... | Page 1371 |
23730459967e-0 | available on TradeStation, it is currently not available on eSignal. More quote vendors will supply this information if their customers ask for it. Also, this information is available for free at www.cboe.com in its “Market Data” section. These numbers are updated every half-hour. | Page 1372 |
495eef56a1a0-0 | Figure 6.10 | Page 1374 |
f935ebbdc1c8-0 | Figure 6.11 What Is the Most Effective Way to See What’s Really Going On in the Stock Market During the Day? The sector sorter list (SSL) is a simple tool that I use to gauge what is going on “beneath the indexes.” I list all the key sectors and have them sorted automatically every few seconds | Page 1376 |
067a7432c46a-0 | throughout the trading day based on their net percent change. This tells me at a glance which sectors are leading the markets higher or lower, and this brings me to my first rule regarding the sector sorter list: Any move without the banks (BKX), brokers (XBD), and semiconductors | Page 1377 |
b7a0ad353285-0 | (SOX) is suspect and most likely will not last. On April 1, 2005, the only sectors up on the day, for the most part, were energy, housing, and gold. (See Figure 6.12 .) One of the worst sectors of the day was the semiconductors, and not far behind it were brokers and banks. I like knowing where these sectors are in the | Page 1378 |
ebba706e64f8-0 | mix for three reasons: First, the giant money-center banks represent the biggest (or almost biggest, depending on current prices) market capitalization sector in the market. The markets need participation from this index if they hope to make any headway. Second, brokers are a great market proxy. As go the brokers, so g... | Page 1379 |
a7d0f0383000-0 | semiconductor stocks. They have a strong following among retail and institutional investors alike. If I see a decline with these three sectors leading the way lower, I am confident that the decline is going to last. The reverse is also true. | Page 1380 |
b32e41a7531a-0 | Figure 6.12 The other way I like to use this list is when the markets are quiet and choppy. Often there are stealth moves in the markets. This happens when the overall indexes are restricted in a tight range, but underneath the surface, a couple of key sectors are deteriorating or firming. This often is not picked up i... | Page 1382 |
f6625ab95e89-0 | index itself. This brings me to my next rule: During these quiet periods in the market, the more sectors that go red, the greater the odds are that, when the market finally does break, it will be to the downside. Conversely, the | Page 1383 |
f4883ddf5edf-0 | more sectors that go green, the greater the odds are that, when the market finally does break, it will be to the upside. Like a doctor’s relationship to a patient’s medical chart, the sector sorter list helps a trader gauge the overall health of the current market environment. ETFs can also | Page 1384 |
ac52c4d01d72-0 | be utilized for this. The nine I like to follow are XLY (Consumer Discretionary), XLF (Financial), XLB (Materials), XLP (Consumer Staples), XLV (Health Care), XLK (Technology), XLE (Energy), XKI (Industrial), and XLU (Utilities). How Do You Know When It’s Going to Be a Choppy Day? | Page 1385 |
eec4ad2f1419-0 | One of the most frustrating things for traders is dealing with a tight-range, choppy day in the stock indexes. Choppy days occur when the stock indexes spend most of the day trading in a slow, narrow range, providing minimal volatility. Most traders don’t realize that the trading is choppy until about halfway through t... | Page 1386 |
d099bad1e559-0 | the amount of losing trades that they have taken. In addition, there are specific trade setups that work great in choppy markets. If a trader relentlessly pursues a setup that works best in trending markets, she is going to get killed. Two of my favorite choppy market strategies are described in Chapters 8 and 9 (pivot... | Page 1387 |
9507a490fe40-0 | what type of market it is going to be as early as possible in the trading day. To do this, I set up a five- minute chart of the E-mini S&P 500 futures, and the only indicator I place on this chart is volume. Once this is done, I place a horizontal line at the 25,000 level on the volume chart (or as close to 25,000 as I... | Page 1388 |
550b85d902de-0 | that the trading during the first hour on September 27, 2011, had the vast majority of the volume bars going over 25,000. This is typical, as the first hour of trading is typically hectic. This means that more than 25,000 contracts were traded every five minutes. The markets traded quietly higher for most of the day, a... | Page 1389 |
9291df78bd1d-0 | spiked above 25,000 contracts and then stayed above that level, it indicated that bears were swooping in for the kill. And kill they did, sending the S&Ps 30 points lower into the close. Volume is extremely helpful in measuring the conviction of the move. Had the market started to sell off on light volume, I would hav... | Page 1390 |
1a06e7ed7229-0 | was just a probe that would most likely fail, and it would indicate a buying opportunity for a continuation rally into the close. However, once the volume backs the move, it’s continuation at its best, and there is no reason to fight it, just go with it. In Figure 6.14 , we can see the $TICK from that same day. For mu... | Page 1391 |
00c91b9532ff-0 | +1,000 level. During this time, any pullbacks to the zero lines were buying opportunities, with moves back up to +1,000 an opportunity to sell that position. However, once volume spiked higher and the $TICK hit its first –1,000 reading into the close, the nature of the market changed. As you can see, all rallies back t... | Page 1392 |
a9409face022-0 | shorting opportunities) as the bears kept pounding the bulls into submission. In fact, the $TICK got as low as –1,200, which indicates extreme selling taking shape. Watching both the volume and the $TICK together offers a great map of what’s going on underneath the surface on any given day. This brings me to my rule fo... | Page 1393 |
2da4f53fbf7f-0 | Figure 6.13 | Page 1395 |
762551b72f87-0 | Figure 6.14 If the first six bars on a five- minute ES chart have most of the volume at or well under 25,000 contracts, expect a choppy, tight- range session. | Page 1397 |
08197bcc2a05-0 | If the first six bars on a five- minute ES chart have most of the volume at or well above 25,000 contracts, expect a more volatile session with better trends. | Page 1398 |
50df532e9d29-0 | This is a simple way to determine early on if the markets are going to be choppy or more volatile on the day. This allows traders to choose the setups that are more appropriate for these types of markets early in the day. To put it simply, on choppy days, it’s best to fade extreme $TICK readings. On trending days, it’s... | Page 1399 |
f287b10ad265-0 | back to the 0.00 line. (See Chapter 9 for more information on $TICK plays.) Listening In on the Floor— What Is the True Value of Pit Noise? There are feeds available from people who are standing just outside of the S&P futures pit at the Chicago Mercantile | Page 1400 |
307d64d7969e-0 | Exchange. They will stand there and call out the current bid/ask prices and make comments on the market action. I like to have this playing quietly in the background on those crazy days when the stock market is moving hard. One of my trading partners, Hubert Senters, likes to play it loud every day, as he pays attentio... | Page 1401 |
7a7774d4e309-0 | introduced me to pit noise, and the first few months I listened to it, the noise nearly drove me to drink, so I turned it off. After three days, I realized that I missed it just enough. These days I like to day-trade the stock index futures on the “crazy days” with the pit noise playing in the background. If it’s a qui... | Page 1402 |
e92b052669b6-0 | use it. First off, it’s important to understand what the people in the pits are talking about. All day long, a trader is going to hear the bid/ask being quoted, and it typically goes like this: “six twenty by a half, six twenty by a half,” and so on. This is a quote for the big S&P contract, which is quoted in tenths i... | Page 1403 |
1ec015d68de0-0 | This means that the current bid/ask is 1,136.20 by 1,136.50. The quotes just focus on the last few numbers instead of the entire price. The person doing the talking will frequently refer to “paper versus local.” Paper coming into the market means that it is a retail order and was placed by a broker such as Goldman Sach... | Page 1404 |
bc6e539b9e55-0 | Merrill Lynch. “Local market” means that the locals are trading among themselves; this happens when the action is slow and the volume is light. I have listened to many pit broadcasters, and by far the best one is Ben Lichtenstein with www.tradersaudio.com . He absolutely loves what he does, and this comes across each ... | Page 1405 |
034d4f29b1a7-0 | four-day seminar in Chicago. We have Ben come in for an hour and talk about how he reads the tape and what listeners should key in on. Then, the next day, we take the group down to the CME floor so that they can watch Ben in action calling out the pit noise live. They see exactly what he is looking at, what he is call... | Page 1406 |
f0df9bddabe2-0 | manage to get one of these sessions filmed, and it is fun to watch on DVD. Here’s some terminology. A “thin top” means that there are not a lot of bids at these levels—look for the market rally to fail. If Ben mentions a scale buyer or a scale seller, I pay attention to what that seller is doing and at what levels. Whe... | Page 1407 |
21db78ad0af3-0 | “top tenner,” this means that one of the 10 biggest guys in the pit is doing something. Once in a while, you will hear that a “top tenner” is stuck short, and this provides great opportunities to jump in on a trade as the top tenner is forced to cover hundreds of the big S&P contracts to get out of his position. This i... | Page 1408 |
a82dbbf65e6f-0 | I also like to listen to the overall noise level. Is it quiet and slow, or is it loud and fast? If the noise explodes, it is almost like the ticks reaching the +1,000 level. This level of activity is unsustainable, and the markets will reverse. If the sound is quiet and then it gradually gets louder, I will go in the d... | Page 1409 |
daf07a19e033-0 | out. My favorite way to use the noise from the pit is to listen and figure out whether the noise is louder on the up moves or the down moves. If a market is rallying and the pit noise is loud, and then the market pulls back and the pit noise is quiet, this is a crystal-clear signal that the momentum is higher, and I wi... | Page 1410 |
dc2898e0027c-0 | pullbacks on these days. The reverse is also true. Once I got used to this, I found it very hard to look at a chart without having this “pit noise indicator” in the background. There are many other ways to use pit noise. If someone is above or below the market with size and the locals fill it, go in the direction of th... | Page 1411 |
65d7dd8617b0-0 | the markets instead of fading the markets. If the pit moderator tells you what the low is, and that low is below the lows of the day you see on your charts, the market is going lower and is about to make new lows on the day. If the pit moderator says look for a stop run at 1,136, pay attention to that number if you are... | Page 1412 |
6b0b1d229f08-0 | The most important thing with pit noise is not to get caught up in the excitement. It is easy to think that this is the Holy Grail when you first get it. But it’s not. It’s just another tool. Traders who get caught up in the excitement of the pit buy the highs and sell the lows, just like any other amateur. Putting It ... | Page 1413 |
d52bccf4ebde-0 | Trading Day from the Opening Bell? It is easy to get overwhelmed by too much data, and the key for reading all of these data is to do it in such a way that your brain can take in the information as quickly and as efficiently as possible. I do this by looking at these data in a certain order, in two columns, top to bott... | Page 1414 |
c8a47580f7df-0 | Figure 6.15 shows how I tie all this information into a single screen. The trin and the trinq are in the upper left, and these are what I look at first. Then my eyes go below this to the PC ratio, which is what I look at second (note that the symbol for this is now $PCVA instead of $WPCVA). After this, I look at the t... | Page 1415 |
243b9d6f2b70-0 | the upper right and to the sector sorter list. Finally, I look at the tiki. I don’t even have to look at a chart to know that the market has been selling off steadily all day. | Page 1416 |
c12494b093ff-0 | Figure 6.15 Figure 6.16 shows these key indicators against the backdrop of a strong market. At a glance, I can see that the trin and trinq are trending lower, and that the PC ratio started off well at over 1.0 on the day. I can see that the ticks are spending a lot of quality time above zero, and that most of the sect... | Page 1418 |
d9a50066457e-0 | positive territory. I can also see, with the tiki, that there have been a lot more buy programs than sell programs. On this type of day, I want to focus on long setups and ignore short setups. In addition to being able to get a solid feeling for whether the market has upside or downside pressure, this will also help a ... | Page 1419 |
1c73d384ab8d-0 | are in “chop mode.” This will happen when these different indicators conflict with one another. For example, the trin is making new highs (bearish), but the ticks are spending all their time above zero (bullish). One of my favorite ways to see whether or not we have a choppy market is also the simplest. I look at the s... | Page 1420 |
fd24e864c8fb-0 | are red, well, it can’t get more neutral than that. I don’t include the ES five-minute volume chart on this layout simply because there is not enough room. I watch this on another screen. I created this layout in TradeStation. You can recreate it by looking at Figures 6.15 and 6.16 , or by going to www.tradethemarket... | Page 1421 |
dea5889e46f4-0 | and downloading a copy complete with all the audio alerts. What Are the Other Main Things to Keep Track Of? Not a whole lot has changed since I wrote this chapter back in 2005. In fact, my updates to this chapter have been minimal, with the exception of the volume numbers on the ES from | Page 1422 |
0d0e7b22fd32-0 | Figure 6.13 , which have grown to 25,000 from 10,000. I’ve also been using the $TICK a little differently, utilizing the 0.00 line as an entry opportunity on those strong days, of which we’ve had so many in August and September of 2011. The $TRIN is still good, although its impact has been muted a bit with all of the r... | Page 1423 |
d9f90ec263c7-0 | volume and skewing the $TRIN numbers—not a lot, but they are skewed a touch. To make up for this, there are two “new” internals that I also watch these days. I say “new” only because they aren’t really new—I just watch them a lot more intently now than I did a few years ago. These indicators are the $VOLSPD (S&P 500 Up... | Page 1424 |
5a0e3145bedd-0 | which is of course the CBOE Volatility Index. | Page 1425 |
7ac6adfd0e15-0 | Figure 6.16 The $VOLSPD is worthless at the beginning of the day, but it’s priceless into the last hour of trading. When I look at this indicator, I think of selling pressure and buying pressure. If selling pressure is sustained into the final hour, then look for a sell-off into the close. If buying pressure is sustain... | Page 1427 |
a5361b92b88d-0 | then look for a rally. This may seem overly simplistic, but there are a lot of fake- outs during the last half-hour of trading. If the stock market sells off seemingly hard, but the $VOLSPD continues to grind higher, guess what? The stock market is going to reverse and rally into the close. The opposite is also true. I... | Page 1428 |
40722c1af5ff-0 | chart of both the $VOLSPD and the SPY on a five-minute chart. Around 1:45 p.m. central at point 1, the stock market begins to rally, and the rally is persistent for nearly half an hour. Is this real buying, or is it a fake- out? By looking at the $VOLSPD, we can tell not only that it is a fake-out, but that the market ... | Page 1429 |
5994dbc435be-0 | $VOLSPD not confirm the rally, but it actually starts to make new lows on the day, which in this case is the death knell for bulls. The markets crater into the close. | Page 1430 |
360e19d4c2b0-0 | Figure 6.17 The $VIX has, of course, been around forever, and it’s importance increases as market volatility increases. This is also known as the “fear indicator,” as it does a good job of measuring panic. Panic, of course, can get overdone, and too much panic is a buy signal. In Figure 6.18 , we see a | Page 1432 |
735d60af4c6b-0 | daily chart of the $VIX on the upper half with a set of standard Bollinger Bands with the settings at 20 and 2. The bottom half of the chart is the SPY. Note that anytime the $VIX rallies up to the top of the Bollinger Bands, and especially when it closes above the Bollinger Bands, not only is a market bottom in the ma... | Page 1433 |
b2cc659193b6-0 | At point 3, see what happened on the day of the infamous “flash crash,” where the market went nuts to the downside for part of the day. The $VIX spiked higher. People were freaking out. And what happened? The market had a violent multiday rally that exceeded the highs just prior to the flash crash. Going along the char... | Page 1434 |
022d1a684c13-0 | reading, indicating extreme fear in the markets, indicated that the selling had exhausted itself. The lesson? Don’t get too excited on the downside if the $VIX is extended. | Page 1435 |
974d9863d2fb-0 | Figure 6.18 I’ll also watch the $VIX on a five-minute chart intraday, as seen in Figure 6.19 . With this, I’m just looking for the $VIX to make any breakout or breakdown moves. The $VIX is fast and will typically break before the market. At point 1, the $VIX popped higher, and shortly thereafter the markets broke down... | Page 1437 |
8cdbf3a88ac9-0 | long as the $VIX is trending higher in this case, the market will continue to sell off. | Page 1438 |
13da21d4bea5-0 | Figure 6.19 For the $VIX, I utilize the five-minute chart to measure the “immediate fear” in the market. For the daily chart, I utilize the daily chart to see when the fear has gotten out of hand and it’s time for a relief rally. And, Oh Yes, Did You Know That If You Ignore | Page 1440 |
6955661bf1a5-0 | This One Thing, You Don’t Stand a Chance? There has been a lot in the press over the past few years about the “carry trade,” but most traders and investors don’t give it much thought. “That’s some weird thing the hedge funds are doing,” they think. “It doesn’t apply to me.” And that is where the traders are wrong. Dead... | Page 1441 |
802c953a8c0e-0 | The carry trade affects the markets today more than nearly anything else. Stripping it down to its simplest measure, it works like this: hedge funds borrow a low-interest currency like the yen or U.S. dollars, and then put those funds into higher-yielding currencies like the Australian dollar. Then they borrow against ... | Page 1442 |
50596c2ff883-0 | assets such as stocks, gold, silver, grains, oil … you name it. Why do they go to all of this trouble? Simple: to make big returns so that they can collect big fees. Why is this important? Because when funds are putting on the carry trade, also known as “putting risk on,” then most asset classes rise in value—the funds... | Page 1443 |
06410658dc43-0 | More important, however, is when funds are “taking risk off.” When they do this, it means that they are winding down portions of their carry trade. To do this, they have to (1) sell off the assets they bought, (2) dump the high- yielding currency they own, and (3) pay back the cheap currency they borrowed. These three ... | Page 1444 |
91420700e711-0 | Why is this important to know? Because when hedge funds are taking risk off, nearly all asset classes will sell off, regardless of what’s going on in the news. That’s great, but how does a trader know when hedge funds are putting risk on or when they are taking risk off? By watching CNBC? No. They aren’t really sure wh... | Page 1445 |
7f934b752691-0 | after the fact. If hedge funds could hide their footsteps and their actions, believe me, they would. Surprisingly, this information on whether hedge funds are putting risk on or taking it off is very easy to obtain. All you need is a data feed. Figure 6.20 is a chart of the AUDJPY cross, where the current price is 73.... | Page 1446 |
e9f5a8a657cc-0 | Australian dollar is equal to 73.74 Japanese yen. Believe it or not, this chart represents what hedge funds are doing in real time. The price of AUDJPY isn’t critical. What is critical is whether the chart is moving higher or lower. | Page 1447 |
53f596acf493-0 | Figure 6.20 It’s not that AUDJPY represents all carry trade activity. However, it does represent one very common carry trade, which is to borrow Japanese yen and then put that money into Australian dollars. The more yen that are being borrowed, the more the Australian dollar is being bought, and | Page 1449 |
301b05e0d665-0 | thus the higher AUDJPY goes (that is, as risk is being put on, 1 Australian dollar can buy more and more yen). Thus, when the carry trade is “on,” AUDJPY will rise. And when the carry trade is being taken off, AUDJPY will fall as Australian dollars are sold to pay back the yen loans. If that seems a little complicated,... | Page 1450 |
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