Currencies | Aug 19 2010
By Kathy Lien, Director of FX research at GFT
Currency traders are being warned to hold off making trades on the Australian dollar until after this Saturday’s election and the economic policies of the newly-elected government are clearer.
GFT director of currency research Kathy Lien said this week it is wise not to trade immediately ahead of the election or during it unless traders are particularly experienced.
“Political uncertainty is never good for a country’s currency and the tight race between Abbott and Gillard should limit the upside potential for the A$ this week. Regardless of who wins, there will be a wait and see period before they actually clarify their policies,” she said.
She suggests that traders look to trade other currencies in the meantime.
“In the short term, a Gillard win may be more positive for the A$ than a win by Abbot because of the uncertainty about economic policies if there is a change of government. Abbott’s greatest weakness has been the economy, which unfortunately is the market’s greatest area of concern.
“At the same time, Labor hasn’t had a great track record on the economy. It seems that both Australian and foreign investors are more skeptical of Abbot’s competency than Gillard’s, but ultimately only time will tell which leader will have a more effective economic policy. Both have flip flopped on things like paid paternal leave and made serious errors in judgment, which explains why the market’s confidence in both leaders is flimsy,” she notes.
“In the long term, investors are more focused on economics than politics and regardless of who wins, growth in Australia is more reliant on the performance of Australia’s trade partners than on its leader.
“If the Greens gain the balance of power in the Senate after the election, it will be bearish for the economy and therefore the Australian dollar,” Lien says.
“Given that the Greens’ support higher taxes, death duties, the Tobin tax on currency transactions, and that they pander to hard left trade unions, the impact is negative on the A$ because their policies are bearish for the Australian economy. The bottom line is that the Greens favour more taxes which may help to rein in the deficit but at the expense of growth,” she says.
How to help control trading risks
With markets continuing to exhibit unpredictable volatility, GFT’s manager of retail sales Australia and Singapore, Brendan Gunn offers several methods that traders can use to limit risks, no matter what currency pairs or CFDs they trade:
· Accept risk and expect losses – it’s part of trading. Don’t expect every trade to be a winner, and plan your trading to take account of this. One technique is to break up risk capital into pools, and spread risk further by using more pools (i.e. 50 pools of $100 each, rather than five pools of $1,000). The more pools you have, the more you spread your risk, rather than risk losing your capital.
· Think in terms of risk/reward, not absolute profit or loss, and set your leverage accordingly. This may be 1:1.5 for a day-trader or 1:10 for a longer view. It’s a balancing act between your money pool per trade, the margin requirements, market volatility and your stop loss.
· Establish a trading plan to impose discipline and take wild emotional reactions out of your trading. The trading plan should be based on realistic expectations and set the opening level of trades. It should determine stop loss tactics, including where you place fixed stops and a trailing stop, and when you will exit from a trade. Don’t let the overconfidence of wins or disappointment of losses prompt you to alter your trading plan rules.
· When choosing your stop-loss, avoid round numbers and obvious levels. Determine whether it will be above a support line, or below it.
· Keep a record and review your trading strategy. Watch a number of markets and charts, and look for patterns – particularly ones that line up with fundamental factors and economic data. Choose a dealer that provides a practice account alongside a live account, as this enables you to set up and test various charts, trading tools and trial trading plans.
To avoid counterparty risk traders should choose a dealer that is a well-established company, regulated everywhere that it does business.
About GFT
GFT offers spot currency trading and contracts for difference (CFDs) in Australia. It opened offices here in 2005. Previously known worldwide as GFT Global Markets and Global Forex Trading, the company streamlined its brand in 2008 and is now referred to as simply ‘GFT’. Founded in 1997, the group was a pioneer in online currency trading and is now is a worldwide provider of real–time dealing, pricing and comprehensive services for financial traders. It offers currency (forex) and futures trading in the US, CFDs, spread betting and forex in the UK, and serves a customer base in more than 100 countries through its DealBook® suite of trading software, including its 360, WEB and Mobile trading platforms and 24–hour, 5.5-days-a-week dealing desk operation. It offers a specialist forex information site, www.FX360.com to traders. The company’s world headquarters is in Grand Rapids, Mich. with global offices located in New York, Tokyo, Sydney, Australia, Singapore and London (London office operated through GFT Global Markets UK Ltd.).
Disclaimer: The contents of this release are provided for general information purposes only and do not take into account any persons objectives, financial situation or needs and are not personal advice. This information is made available by or for Global Futures & Forex Ltd. (GFT) in Australia (ABRN 103 508 461, AFS License 226625). Trading of foreign exchange contracts, contracts for differences, derivatives and other investment products which are leveraged, can carry a high level of risk, and may not be suitable for all investors. It is possible to lose more than the initial investment. A Product Disclosure Statement (PDS) is available from the company website www.gft.com.au <http://cl.exct.net/?qs=49759c57059fd74494a17f399d2ee8e5fe8985911e463181a1282917598c35ea> . Please read and consider the PDS before making any decision to deal in GFT products. GFT is the issuer of these products. © 2010 Global Futures & Forex, Ltd. All rights reserved. CD12A.024.081810
