James Dicks FOREX Newsletter - July 2008

The Value of Calculated Risk
By James Dicks

If you have become a successful investor, you already know that taking a well-planned and deliberate risk is a key factor in reaching your goals. While it might sound a little intimidating, it is an essential part of investing, entrepreneurship and life itself. Think about it – we all take a big risk just getting up in the morning but if we decided to just lie around all day we would never accomplish anything. It takes some type of specific action; it takes a planned and determined venture to make something happen.

We constantly hear stories about “special” individuals who achieve success. So what makes them so special? The answer is simply a personal willingness to get up and do something! A passion to take the time, the effort, and a bit of a risk to make something important happen in their lives. Yes, it’s that easy but never forget – you have to do something to make something occur and that takes an effort and determination.

Recently, the markets have been quite volatile but you must never lose sight of the fact that when one sector is losing, something else is winning. So don’t just throw up your hands and wait on the sidelines while looking in vain for opportunity. If stocks are showing weakness, you might consider moving in to a cash position. If the dollar is weak, you should closely watch the FOREX pairs to determine which ones might be profitable; or maybe investing in commodities would suit you better. It’s entirely up to you but you must make the decisions necessary if you ever hope to excel. I’ll say it again, when something is losing, something else is winning. You must closely study your plan; determine the risks involved in any particular action and then decide whether or not to do something. Essentially, you need to determine a direction in order to take advantage of any opportunity.

Although a certain amount of risk can create energy and bring you to a higher level of accomplishment, there’s much more to it than that. There is a sincere satisfaction that comes when our personal achievements create rewards for others. I sincerely hope that the decisions I’ve made over the years and the corporate directions my company has taken has helped our customers in achieving personal financial security. I trust the information you get from us will allow you to grow financially so you can send your kids or grandchildren to college, take a needed vacation or just generally create a little breathing room in the form of a successful cash flow.

In the business world of the 21st Century, there is a definite danger of becoming too content with our situations which normally coerce us to remain in our comfort zones and that attitude can be damaging to our personal drive. I have found that top-quality performers who excel in their endeavors are ruthless risk takers. Those who decide to take the risk see the potential that others can’t even begin to imagine. I constantly try to take the road less traveled and pull away from the crowd.

None of us has any idea what rewards we will be poised to receive when we step into the unknown but one thing I do know; there will be no rewards unless we’re willing to take a risk. So, decide today to leave your comfort zone. No matter what your goals, develop a passion for what you do and prepare yourself to reap the rewards that taking a risk can bring to your life.

Happy Investing!

James Dicks
President/CEO JamesDicks.com



This Month in the EUR/USD
By Scott Nourse

The EUR/USD hit a new peak this month, but it looks increasingly likely that a top is in place. While we cannot be sure this ‘top’ is one that will hold for years, the dollar is really showing a good deal of resilience as it fights off another leg lower. We first breached the 1.6000 level in March and have since been trading sideways above the 1.5300 area. A new high around 1.6040 was reached on July 15, but with no follow-through. The currency pair is currently pushing lower from this high and could be looking back to the lower end of its range around 1.5300. I will now discuss the fundamentals before wrapping up with a projection.

The fundamental picture in the US is troubling. Housing is still a mess, interest rates are low, inflation is high, and consumers are hurting. However, as I mention each month, the US is not alone. Euro-Zone countries are hurting as well, especially those who depend heavily on exports such as Germany. The euro’s high exchange rate and 4.25% interest rates are not helping businesses or consumers cope with a slowing global economy. Confidence indicators are declining rapidly and growth in some of Europe’s most important countries will be well below trend this year and next. To me, this sounds like a recipe for at least a decent retracement in the euro; not just against the dollar, but against any currency where it currently trades near multi-year highs. Focusing on the EUR/USD, however, my outlook is as follows.

The EUR/USD should continue lower toward the 1.5000 level without any real catalyst. The bottom line is that the exchange rate does not reflect the deteriorating fundamentals we’re already seeing in Europe, never mind future expectations. We are teetering on a daily trend line that supports prices just below 1.5800. Below here, the door should be open to the 1.5650/5600 area. The 50- and 100-day moving averages are on top of one another near 1.5650 with a low from July 7 at 1.5610 below there. A daily closing price below 1.5750 places high probability that the lower level may be tested soon. If the EUR/USD picks up momentum and closes under 1.5600, we could be back at 1.5300 in a matter of days. Once bulls feel like a double-top is really in place the selling can intensify greatly as long positions are unwound.

That is how I see the EUR/USD unfolding as of today, July 22, 2008. Of course, we must remember how frequently the tone changes these days. It was just yesterday that I looked at where the pair would run to if 1.6040 was broken. Keeping that in mind, there is more room down than up. If we do take out 1.6040 we are looking for 1.6200-1.6300. Finally, we need to keep a close eye on commodity prices. It is no coincidence that the dollar is benefiting form declines in oil and gold prices. If a natural disaster, terrorist attack, or any other catalyst forces oil up sharply I fully expect the dollar to fall.



Risk and Risk Aversion
By Adam Horak

Talking with investors I find the more time I spend educating, training and supporting FOREX traders, the more I come to realize the less the average trader knows. It’s not a trader’s fault they don’t understand some of the technical nuances of the market or that they may not understand how and why currencies move during certain market conditions. The average trader just has not had the opportunity. I thought it would be fitting in this month’s article to take a couple minutes and explain one of the more commonly talked about topics for currency traders that they may not fully understand.

I’m talking about trader’s appetite for risk or need for risk aversion. Often when you refer to having an appetite for risk or looking at risk aversion you are trading currencies with a low interest rate like the JPY or CHF. When traders are looking for high return investments they are said to have an appetite for risk, they will often borrow YEN or CHF in order to obtain other assets they expect to gain a higher yield from; maybe from other currencies on carry trades or equities that are performing well. You may also hear traders refer to risk aversion, when we see a broad based pull back, traders will look to unwind those positions and buy back the YEN or CHF that was previously sold, causing the YEN or CHF to rally. Traders will unwind these more risky positions in order to limit potential losses.

Appetite for risk and risk aversion are not only a financial or economic concept but psychological concepts as well, with trader’s emotions playing a big part in how they view risk. There are several concepts or theory’s traders’ use when evaluating risk. Now it’s time to break out the Macro/Micro economics books and look the mathematical basis and formulas trader’s use to determine Risk/Risk Aversion.

Traders often look at a Utility Theory; where a consumer has a utility function U(xi) where xi are amounts of goods or services used with an index of i. From this, it is possible to derive a function u(c), of utility of consumption c as a whole. Here, consumption c is equivalent to money in real terms, i.e. without inflation. The utility function u(c) is defined only as a liner transformation. The Utility Formula shows how traders analyze a situation for a risk-averse trade: The utility investment, E(u) = (u(0) + u(100)) / 2 is the equivalence of CE is the risk premium, Or ($50-$40)/$40 or 25%. Traders may also look to avoid all risk by analyzing the curvature of u(c), the higher the curvature the more adverse a trader becomes to risk. Traders need to be able to measure risk from an absolute or constant point called the Arrow Pratt measurement of Absolute Risk Aversion (ARA) named after economists Kenneth Arrow and John Pratt who gave us the formula for determining (ARA) from a constant point Ru(c)=-u”(c)/-u”(c) using the utility form of u(c) = − e − αc shows the constant aversion to absolute risk (CARA) with ru(c) = α is the constant with respect to c. IN order to have Decreasing/increasing absolute risk aversion (DARA/IARA) if Ru(c) is decreasing/increasing. An example for a (DARA) utility function is u(c) = ln(c),Ru(c) = 1 / c, while u(c) = c − αc2,α > 0,ru(c) = 2α / (1 − 2αc) would represent the utility function exhibiting (IARA). Contrary to what many traders may believe having capital in your trade account does not make one adverse to risk.

Traders looking for theories on Relative Risk Aversion most commonly known as (RRA) is defined as a corresponding term with Constant Relative Risk Aversion (CRRA) and Decreasing/Increasing Relative Risk Aversion (DRRA/IRRA) look for the advantage of the value of measured risk aversion, if your apatite for risk changes and allows for higher risk tolerance, look at the coefficient for Relative Risk Aversion as c with u(c)=c1-p/1-p your risk aversion is now R/u(c)=P when P=1 this will simplify the log utility income effect on savings.

Traders may also use what is known as a portfolio theory, this allows traders an aversion to measured risk as additional margin rewards required to assume additional risk. Using the Portfolio Theory risk is measured as the mean or standard deviation of the return on investment. The Square root of the variance is measured to the n-th degree also know as the (radical) using A or An. Or A=dE(r)/dq or An.=dE(r)/dn.overUn.=1/n dE(r)/dun.

Too put this into practice terms and use, traders may limit there inherent risk exposure by utilizing good money management with appropriate risk to reward ratios, using risk capital will help limit the psychological affects of risk and risk aversion. You may also implement any risk or risk aversion formula into your trading thus limiting the risk premium; I personally use a formula of account balance times percent of acceptable loss divided by the number of pips in my stop equals the number of lots I can trade. It’s simple but effective.


Fiscal Responsibility and Me
By Deryk Banks

It is no secret that economic woes are pervasive at this juncture in time. On a daily basis we are bombarded with news of higher gas prices, higher rates of foreclosure, skyrocketing food prices and the threat of unemployment.

The view for many is dismal, at best, and downright ugly for many others. Imagine being the young woman who must pick up everything she owns, children in tow, and moves on a weeks notice, due to a landlord’s foreclosure. Or, how about the retired gentleman, living on a pension, who loses his healthcare benefits because his former employer needs to make deep cuts to stay solvent for the new crop of workers and shareholders. Tough times call for tough decisions and not everyone can be on the winning end of the stick.

Although the day is gloomy, dark clouds revealed only by terrifying strikes of lightening, there is still hope for the future. There is a hope that we will learn a few lessons in bad times, which will translate into good habits in times of splendor. For one, we are as a nation, in great need of a lesson in fiscal responsibility. Our society has increasingly become “purchase and ignore” driven – meaning we make purchases, ignoring the consequences, like high credit card balances at high interest rates. Many of our purchases are impulse buys, which retailers count on to make the bottom line. We spend more time researching features of that brand new flat screen television than we do consulting our finances to see if we would be better off paying down a credit card or an extra payment or two on our car loan. Considering this is our society’s general thought process in good times, when times are bad our financial mistakes are magnified to a level where they can no longer be ignored. Unfortunately for many, this is the wrong time to try and recover. Often times meeting our mounting obligations means raiding our 401k accounts. It could mean dipping into little Johnny or Suzy’s college savings. Thus, we take one issue and create another one, which may not have implications in five years, but may have serious ramifications in 10 to 20 years.

How could anyone find a silver lining in any of that? Well, for starters, anyone in this situation must take responsibility; more specifically, fiscal responsibility. For example, according to an online article in the Orlando Sentinel dated July 22, 2008, a couple awoke one day to find $50,000 deposited in their bank account. Now, their financial situation presented them with two options. Use the mystery money to pay off bills or mention it to the bank and find out where the money came from. The couple chose to spend the money, though not extravagantly, and pay off bills. Excellent choice in the short-run, right? No more bill collectors for a while. Well, it turned out to be an extremely irresponsible choice as the bank recognized the mistake and wanted the money back. The couple had another set of choices, either own up to the “mistake” or just pretend it never existed. To pretend it never existed was another costly “mistake” - one that cost them a judgment of $150,000. The couple wasn’t fiscally responsible, and filed for bankruptcy. There were two quotes that made the thought process of the wife (and apparently shared by the husband) evident. The first statement as quoted in the Orlando Sentinel was "It's not like I went to the bank and robbed it of $50,000.” The second statement was quoted as “They made a mistake, and now they're trying to make us pay." While this is an example that seems far from the norm, we aren’t much wiser when we dip into the pot one or two too many times, frivolously spending our hard earned cash and leaving little for a rainy day. Rainy days come in the form of health issues, high prescription costs, and medical bills. Rainy days come literally in the form of hurricanes and floods for some. These are things we cannot control, yet must try to prepare for; but $50,000 showing up in your bank account is not a rainy day. There are plenty of decisions we do control, plenty of decisions that are equivalent to shooting silver iodide into the clouds above our lives. So we have to take responsibility for our actions when it comes to fiscal responsibility.

The reason why I like the term fiscal responsibility is because it has a much more resounding ring to it than budget. People don’t like to budget. Maybe we need to change our thinking. Our homes and families are no longer safe havens from the outside world. We are now running the equivalent of mini-corporations. Therefore, we have to be fiscally responsible to our shareholders, our children and grandchildren. How we make our financial decisions affects generations to come. If we buy a home with payments that we cannot afford, we may not necessarily foreclose on the loan. However, we do our shareholders a disservice if we cannot provide for their education due to the fact that we have a mortgage large enough for two lifetimes. My mother would say “You are robbing Peter to pay Paul.” Only now we are experiencing a phenomenon where Peter gets robbed, but Paul never seems to get paid, resulting in a lose-lose situation. So I am not preaching a message, but I think opening the dialog, especially here in the greatest nation on earth is prudent.

I believe in having nice things – my favorite vehicle is the Bentley. I have seen homes I like in the three to four million dollar range. I feel we are all entitled to it if we work hard and can afford it. Where we get confused is whether we can afford it and still be fiscally responsible to our shareholders. However, as a nation, the worst thing that could happen is that the rain goes away and we haven’t learned any lessons. Our job is to think about it the next time we need to make a financial decision that could derail our financial futures. When times are good, do things to ensure that when times are bad we are covered sufficiently – like save a few bucks on that new car loan or new mortgage. Invest the difference in the market and build a nest egg.

Spend a few minutes and create a grocery list and put the difference in savings. Skip the new flat screen and invest that big bonus in a company that leads the market in manufacturing and marketing them to consumers then let the dividends buy your new television. Once we get this down as a nation, I believe the entire world will have to sit up and take notice. Fiscal responsibility will lead to wealth beyond belief.


High Gas Prices? Don’t Blame the Traders
By Kiara Ashanti

Turn on the television, and across the channels you will see politicians, prognosticators, and reporters, playing America’s favorite game - the blame game. Today’s and tomorrow’s topic of choice remains the concerns of high gas prices. Everyone is feeling it at the pump and in an election year that means someone’s got to be blamed, so that someone else can get votes.

Conventional wisdom (well maybe, not wisdom) from the left is that it is the fault of the greedy oil companies. This is usually coupled with the mantra of Americans being addicted to oil - a statement President Bush surely regrets uttering. Blaming ourselves for yet another problem in the country is an old habit of the left, but one that is usually rejected by most Americans.

If you swing over to the Right side of things; you will hear it is the fault of the Democratic Congress for blocking oil drilling offshore or in ANWR. This past week, President Bush lifted the Presidential ban on offshore drilling. It’s a shrew move in an election year with few issues the GOP can sink its teeth into, but it is an empty gesture. Lifting the ban means nothing if Congress does not reverse legislation outlawing offshore drilling; something the Democratic Congress will not do. So the Republicans get to point fingers at the left and say, “see it’s their fault.” Of course, the fact that Republicans had the White House and a majority in the House and Senate for most of the last 12 years is conspicuously absent from their conversation. More importantly, it distracts you the voter from what’s really going on. A distraction that gets better when both sides throw one group of people under the bus at the same time.

Democrats and Republicans cannot agree on most things, but they are agreeing on one point. That commodity futures traders, or “speculators” as they are dubbed in the media, are the primary culprits in the rise of oil and gas prices. Florida democratic Senator Bill Nelson has called for legislation that would outlaw futures oil trading. Not to be out done, White House press secretary Dana Perrino attacked speculators in a press conference as well. Outside the political fight ring, railing against speculators was started early on by FoxNew’s Bill O’Reilly on his show, “The O’Reilly Factor.” The back and forth from all sides is entertaining at times, but all their assertions are dead wrong.

The belief is that traders are bidding up the price; betting that prices will continue to rise. This belief though shows a true lack of knowledge regarding how traders work, and how markets work. In order for any group or trader to affect global prices they have to be large enough in terms of money invested to move the market. But the speculators do not possess that type of accumulated financial prowess. The guys that put up 10% and trade in and out of the market three minutes at a time cannot move the market long term. They are not big enough. If you added them all together, they would not even add up to three percent of the average volume traded. This argument is the same one that “CNBC experts” made in the late 90’s about day traders. They blamed the rise in the market on day traders, even though the volume traded by them was less than one percent of the average volume traded at the time.

The primary cause of high prices is our monetary policy. “If the value of the U.S. dollar was not declining oil would be $80 a barrel,” says Courtney Smith, a professional Forex, and commodities money manager. It is a simple fact that has been glossed over by both parties, and the media. “There is no doubt that the easing of interest rates has had the largest affect on the price of oil. It’s not speculation,” Smith adds.

King Abdullah of Saudi Arabia made this very point a few months ago in a statement lamenting the weakness of our dollar. Since our money is valued less, OPEC has to charge more to make up for the loss in value. Gas prices grab the headlines, as does food prices, which are also increasing, but prices on all foreign imported goods have risen as well. If the Federal Reserve started raising interest rates the dollar would strengthen, and gas prices would decrease. If the President announced spending cuts as well, prices would go down even faster. So why won’t the Fed do just that? Certainly, the state of economy and the fear of inflation would dictate an upward move in interest rates. It’s a question astute economic experts have been asking for months, but one absent from the questioning of Ben Bernanke in his latest Congressional testimony. Smith has a simple answer.

“It’s not their job to do what’s best for the economy. The Reserve is a private corporation owned by banks. Ultimately, the Fed is going to do what’s best for banks, regardless of the economy, or in this case gas prices.”

That may come as a shock to most people, but it’s the truth. The Fed will raise rates only when there is an inflation fear, because inflation will harm the member banks. But apart from that they will not act. Which means the price of gas will not move no matter what happens in the near future. This point cannot be stressed enough.
Blaming the speculators is scapegoating. But it could lead to new margin regulations or other legislation that would only make the market less liquid. This in turn would make prices higher, not lower them. This is what happens when you do not pay attention to the real problem. You create “solutions” that don’t solve the problem and usually make things worse.

It makes sense for the Republicans to ignore this because it is a hallmark of the Bush economic policy. Keep the dollar weakened, and sell more exports. The lower the dollar the more foreign companies and countries can buy of our goods and services. The downside, of course, is that everything else is more expensive for us, i.e. gas. On the opposite aisle, Democrats don’t talk about it because another way to strengthen the dollar is to cut spending. That does not fit into the policy agenda they hope to achieve with an Obama presidency. Besides, they can make more hay blaming oil companies and speculators. As for the media, they do not know anything about trading, so they go after the biggest target - traders.
Do not fall into that trap, however. Looking for ways to stop speculators, or increase oil supply will not do a thing in the near term for gas prices. Fixing our monetary policy is the only thing that will lower prices quickly. Anything else is just a smoke screen.


Downsizing the Computer
By Jack Lott

Up to this point, you’ve probably traded in your bulky desktop computer for a sleek, new, Wi-Fi capable laptop; but have you considered what your next step in computing is likely to be? If you have been opposed to buying a personal “smart phone” – you might want to rethink your decision. Just like the disappearance of the floppy disk – your laptop computer might become an obsolete piece of equipment in the near future in favor of the smaller and more easily transportable smart phone.

As the availability of hardware and the dependability of our wireless networks spread around the globe, doing business anywhere has become a requirement of modern day commerce. Plus, the chips used in today’s cell phones and MP3 players are helping to create even more robust portable CPU power sources and some experts actually predict that that they will massively increase our wireless potential in the next couple of years.

Apple’s iPhone and the various Blackberry models are the leaders in the smart phone battle today. Both are becoming more like the other – the iPhone is becoming more attractive to business with its recent 2.0 firmware upgrade while the new Blackberry models (like the upcoming Blackberry 9000 Bold) is now more sought after by the consumer. In a variation of an old adage – “the more they change the more they become the same.” The new iPhone 2.0 and 3G models offer Enterprise push email capabilities and a durably secure VPN application that has business around the world buzzing. The new Blackberry Bold, meanwhile, will offer a newly designed media player that actually syncs with iTunes (another battle victory for Mr. Jobs).

Laptops recently started to take a backseat to smart phones because of the unpredictability of Internet access (an active Wi-Fi spot may not always be available). Smart phones always have a fairly reliable connection to retrieve email and other online resources. Recently, the availability of GPS (Global Positioning) features have made these devices very attractive to traveling businesspeople and most of them offer an entertainment aspect that will also help a determined traveler who is caught between airline flights. Most “smart” devices have enough memory (or the ability to add memory using an SD card) to download music, pre-recorded video and some even have the capability to watch live television programming.

On a personal level, smartphones can be productive and fun. Many are purchasing these handheld devices for some of the same reasons as the typical business buyer; for the music and videos, games as well as receipt of personal emails. Some people are actually trading their portfolios using specially designed mobile Internet sites or writing letters and reports using something called “eText,” which is a word processor and text editor that can be used with a Windows Mobile Smart phone. The consumer will also find uses for the advanced calendar functions, digital address book and – oh yeah – did I mention it is also a standard cell phone.

I’m sure there will come a day when all our cell phones will be “smart.” As a matter of fact, there are parts of this world that are just now beginning their enter the world of online computing using desk top computers, something that sounds a bit “pre-historic” to most of the industrialized world. It could be that these developing nations may just start with smart phones and skip all the tedium in between. I mean, if you can purchase the ability to jump into cyber space for a couple hundred dollars using a hand held device why wouldn’t that be the way to go? Sure sounds logical to me.

Almost every cell phone developer sees the writing on the wall and is now creating their unique versions of “smart” devices. Some of the corporate names (other than iPhone and Blackberry) you’re probably familiar with - Palm, Samsung, LG, Motorola, Sony Ericsson – the list continues to grow almost daily. Just do your homework and find the smart phone that will work best for your needs. There’s a lot to consider, things like which operating system will work best for you; each has its own peculiarities, requirements and benefits. The best thing is to read as much information as you can and then talk to your wireless provider. You might not get the answers you expect.

One thing for sure, if you don’t have a smart phone today, you’re likely to have one in the future. I’m attached to mine and wonder what I ever did without it. We have so many things to do and so much to remember in today’s demanding world, it’s nice to know there’s something out there that is smarter than we are to help us stay on track.