Battered and Bruised

Battered and Bruised

It was a manic Monday for the British Pound, plunging hundreds of pips against major currencies on word of new troubles in the lending sector. Mortgage lender Bradford and Bingley, popularly known as B&B, is in serious trouble, and is selling off a huge chunk of its business in an effort to remain afloat. The news hit the British Pound hard, sending the currency spiraling to a 300 pip loss vs. the Japanese Yen in the space of three hours (see Figure 1).



Figure 1: 15 minute chart shows GBP/JPY plunge of 300 pips on June 2. Source: Saxo Bank

Both Bradford and Bingley started out as separate "building societies", and merged in 1964. In recent years, B&B has transformed itself into a specialist mortgage bank and is now Britain's largest provider of loans to landlords and property investors. Clearly this is not the best business to be in right now, as the U.K.'s housing bubble appears to be deflating rapidly. B&B also provides so-called "self-cert" loans for the self-employed, similar in some ways to the "no-doc" loans that caused so much trouble for U.S. mortgage companies over the past several years. To shore up its finances, the lender is planning to sell a 23% stake to US private equity giant Texas Pacific Group. B&B also was forced to cancel a rights offering that was designed to raise capital to shore up the lender's bottom line. As traders digested this news, the British Pound was hit hard against the U.S. Dollar, with the GBP/USD pair falling over 200 pips before finding support at 1.9600, as seen here on the hourly chart (see Figure 2).


Figure 2: GBP/USD takes a hard fall, losing over 200 pips in short order. Source: Saxo Bank

The Great Britain Pound - U.S. Dollar chart is intriguing on the longer time frames as well; in fact, some have suggested that the weekly chart shows a massive head and shoulders formation. Depending on how you look at it, one could say that this sloppy top has been under construction for several years. You can also see that the Pound has not been strong against the greenback for months, stretching back to November. This is despite the fact that the USD fell to new lows vs. the Euro and Australian Dollar during that time. Hey, it's not pretty, but you can see a topping formation in the chart, with major support in the area of 1.9400 (see Figure 3).


Figure 3: GBP/USD weekly chart shows a long-term topping formation. Source: Saxo Bank

Like Glenn Close's obsessed character in the classic '80's movie "Fatal Attraction", the subprime/credit mess just won't die. So what's next for the British Pound? Traders are looking for clues as to whether a bailout might be in the works. Northern Rock, the best known British victim of the credit squeeze and a rival of B&B's, was nationalized by the British government after it ran into severe trouble acquiring credit to finance its operations. Keep an eye on the minutes of the Bank of England's most recent meeting, to be released this Thursday, for indications as to whether the BoE had deeper concerns about the banking sector when they met recently. Just the thought that after all this time there could be more shoes to drop - possibly another Bear Stearns, or another Northern Rock - could serve as a major blow to confidence in both currency and equity markets. Stay tuned.

Email of the Week

Q) Hi Ed, I read your articles and they gave me the little push I needed to begin to make some gains in this market. I want to know what you think of my way to trade. I'm a day worker, and I trade from 22:00 (EST) to 02:00 (EST). My risk is 6% per trade (because my $1 dollar per pip mini account), and never left an open position overnight. The most of the time I never get big moves, just little swings, and at least try to take 1:1 risk reward ratio plus the spread, but this does not always happen and sometimes I get out early if I notice some risky move.

Now in almost two months I have a gain of 45%. I win 62% of my trades, 15% breakeven, and 23% loss. If I get more equity on my account I will reduce my risk per trade, close half of the positions on some level, set my stop at breakeven and let my profits run more. I wish to know your opinion and perhaps some advice from you. Thanks for your time!

Ed Ponsi) Thank you for your kind words, I really appreciate it! Wow, it sounds like you're doing great trading the Asian session, congratulations! I'm glad to hear that you're making money, now I need you to protect your gains with good risk management. It sounds like you're already doing this, but risk management is a never-ending struggle - especially when you are doing well! It doesn't matter how much money we make if we give it back, so job #1 is to hang on to those gains, no matter what market conditions may occur. Here are some changes that I would try to make:

1) Increase your risk-reward ratio. One of the tenets of good trading is to make more money when you win than you put at risk when you lose. In my opinion risk to reward ratio is more important than the number of winners vs. losers. I've seen plenty of traders who had a high win-loss ratio, but because of the level of risk that they are taking, some of them are just one loss away from a margin call.

2) Try to reduce risk and work in those partial exits; this is a great way to let winners run. I know that this might be tough because of capital concerns, etc. but at least create game plans for doing this. That way, when you're ready, it won't seem like a strange new world to you.

3) Don't forget to have fun! As traders, we have the best job in the world - we are basically paid to play a game of pattern recognition and psychology. What could be better than that? Be sure to reward yourself for all of the hard work that you put into learning how to trade, you deserve it! This is also important psychologically, that you have some kind of tangible reward for the work you've done - even if it's symbolic. Congratulations and keep up the good work!

The Bo Diddley Beat

What can you say about a man who had his own beat named after him? I was lucky enough to see this rock guitar legend perform on Randall's Island (a sliver of land on New York's East River, located between Manhattan and Queens) in the summer of 2004, and he tore it up - not bad for a man in his mid-seventies! Rest in peace, Bo Diddley.

Have a question about Forex trading? Send an email to eponsi@tradingacademy.com and we may use your question in an upcoming newsletter. Until next time, best of luck to you in trading.