Thursday, December 25, 2014

Janet Yellen Can Ruin Your Portfolio

“Greed is one of the cardinal sins in trading.” – Maite Krausse

Janet Yellen assumed office on February 3, 2014, as chairwoman of the Federal Reserve (the central bank of the US). Going back to the topic above, this isn’t to say that Janet will take control of your portfolio and ruin it. However, the Fed can make decisions and take actions that can have negative (or positive) effects on your investment. The Fed’s assets are worth trillions of dollar. In my opinion, the office of chair of the Fed is more important than the office of MD of the IMF (the International Monetary Fund), and that’s why decisive actions taken by the Fed have far-reaching effects on the markets – far more than the decisive actions taken by the IMF.

The Chair of the Fed is more powerful than the MD of the IMF. Janet is the main decision maker, for the Fed can’t take a major action without her approval. One of such major decisions was pumping dollars into the American economy (quantitative easing), which was going on for several years. This was done to help the economy grow, though the growth was slower than expected.  The Fed regulates banks, but most of their top executives are academics rather than bankers. The Fed is independent. Even the US congress cannot control it because their independence is respected, just like other rights spelt by the U.S. Constitution. Unlike some Federal officials and secretaries, the Fed officials aren’t told what they do; not even President will tell them what they do.  The Fed decides to spend money according their powers. They keep interest rates minimal in order to encourage loans, which in turn may provide stimulus for an improved economy. Most speculators are affected by the Fed decisions – whether they know it or not.

As far as inflation, unemployment, banks and other important issues are concerned, The Fed can take any actions. Janet can approve or disapprove bank mergers. Apart from banks, she can even regulate financial institutions (under Dodd-Frank). She’s even been given powers to regulate big insurance companies. One thing, nevertheless, must be noted. The Fed isn’t infallible. They can make decisions which can have adverse effects on the US economy and the market. Some of their actions, like quantitative easing, have not brought the ideal results. It’s possible that things can even turn out better without the Fed, but they’ll continue taking actions while hoping that things would become better. 

The decisions taken by Janet can have serious effect on your investment, whether you’re an American or not. Those decisions can ruin your portfolio or help it to grow. Recently, the Greenback has been very strong, and the strength has been ongoing for several months, making that currency the strongest around. As a result of this, Gold, Silver, Euro, Aussie, and others have been under serious bearish pressure. The protracted strength in the Greenback has caused various protracted effects in the Forex markets: USD pairs have been strong or weak, depending on whether the USD is the base or counter currency of each pair.

Janet Yellen Can Make Your Portfolio Grow
Let’s take USDJPY for example. Since July 2014 until the time of writing this piece (December 2014), the pair has gone upwards by over 1800 pips, making it one of the strongest existing trends in the Forex markets. The simple reason for this is the great strength in the USD and great weakness in the JPY. This great trend has made trend followers realized lots of profits, while those who‘ve gone against it have been sliced up.

If a good trader is caught in a wrong side of a great trend like this, she/he quickly truncates his position. If caught in the right direction, a good trader would also capitalize on the trend by riding it. If caught in a wrong direction, a bad trader would continue to run her/his loss until a margin call is received. After you bet all your account in one single trade and things go contrary to your expectations, you may want to smooth the adverse position. As Dr. Peter Putz pupts it, after all, a miserable end is preferable to misery without end.  If a bad trader is caught in the right direction, she/he will quickly exit the position with a small profit, based on the fear that the trend would soon reverse.

Janet Yellen isn’t, and can’t be held responsible for the effects her decisions have on your portfolios. You make your trading decisions and bear responsibility for them, whether the outcome is positive of negative. The trend that has brought big losses to some people has also brought big profits to some people. Such is trading and such is life.

It doesn’t matter whether Yellen was dovish or hawkish. Even a wonderful trading idea can become a flop without you knowing why, but determined traders can make money in the markets no matter the actions taken by the Fed. In the current market conditions (and the future market conditions), you can make it.

We open trades and then allow the forces in the markets to work in our favor.  We should continue to stick to our good strategies in spite of occasional losing streaks, unexpected events, crashes and good signals. The good strategies would eventually bring profits.

Conclusion: No matter how complicated you make your chart analysis, it doesn’t translate to consistently huge profits. When you forfeit a fortune in the markets, you’ll either swear not to trade again or become more determined to do all you can to become successful in this business. Losses are good in that they teach you valuable lessons that make you become a better speculator.

This piece is ended by the quote below:

“Only fools think they know it all. Investing is a lifelong education and its teacher is loss. I will continue to have losses and make mistakes, but I can continue to increase my success rate, and most important, decrease the time it takes for me to realize I made a wrong decision.” – Ian Cassel

Learn from the Generals of the Markets: Market Generals

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