The Future of the Euro

                Anyone who follows the markets is well aware of the ongoing sovereign debt crisis in Greece.  Even after receiving 110 billion euros in bailout money to buy time for new austerity measures to kick in last year, Greece is still in no position to privately raise enough money to cover their debts.  Taxpayer protests are becoming more frequent, their debt continues to receive downgrades, and major restructuring looms on the horizon.  With the problem become more serious every day, it’s about time we started to think a few months down the road about whether or not the euro will remain as Greece’s currency.  Or if it will even exist at all.

                Sure, it would take a hell of a lot for the euro to vanish completely in the next few months, but the idea of Greece dropping the currency isn’t that farfetched.  After extensive measures have already been taken to eliminate their deficit, the Eurozone leaders are beginning to run out of options.  Foreign investment has already come to a standstill.  This is undoubtedly the worst off the euro has been in its short history.  Let’s go ahead and think about what could happen if things don’t turn around for Greece (worst case scenario, of course).

1.       The spread between Greek bond yields continues to grow and Greek deficit increases.  Political foundation is getting shakier by the day.  The IMF decides they aren’t confident that Greece will be able to fill financing gap for the upcoming year, and they decide against providing additional bailout payment.  The IMF’s payment would most likely fall to the EU and to nations like Germany and the Netherlands that are tired of holding Greece’s hand.  Just because they share a currency with Greece doesn’t mean they enjoy being responsible for keeping another country’s economy afloat.  They don’t want to pay.  To top things off, Greece probably won’t be returning to the financial markets next year, which will cause them to miss out on an additional ~24 billion euros.

2.       With no way to raise enough money to cover their 13.4 billion euro debt that’s due, Greece defaults next month.  This action causes Greek credit rating to plummet and its shockwaves spread to the country’s businesses and banks.  It also causes troubles in other EU nations.  Portugal and Ireland can expect downgrades, and confidence is lost in the entire bailout process.  Skepticism will arise over whether or not other European nations are credit worthy, and a huge gap will form between the highly rated countries and the ones with junk ratings.  Fragile nations like Italy and Belgium start to feel the pressure of their own downgrades.

3.       With basically no other way get back on the right track without enduring a painful recession, Greece decides to drop the euro in place of a much cheaper drachma.  Now that they are in control of their own currency, they devalue the crap out of it and start fresh.  Meanwhile, the rest of the euro zone is reeling.  Portugal and Ireland become the new Greece, and more bailouts are required.  The euro begins to devaluation, and confidence is lost in the EU.  Countries revert back to individual currencies, and the short-lived euro fades into history…

Of course, a significant chain of events would be required for this to happen.  This is also coming from a civil engineering undergrad whose interested in economics, not a Ph.D in economics.  But something this drastic COULD happen, and it could change the way us we trade currencies forever.  Just a little something to keep your brains churning over the weekend.  Good luck finishing up the week!

Strategy Development

A successful trader can't be successful for very long without a good strategy.  If you ask me, trading is simply gambling if you don't have a plan.  Every serious trader should put a significant amount of time into coming up with strategies that give them the opportunity to be profitable day after day, week after week, and year after year.

A big part of strategy development is knowing and understanding what your good at.  There are an infinite amount of trades you could make everyday, but we all know its impossible to make every one of them.  Focus on finding the setups that make sense to you and that you are comfortable making.  Don't make things complicated; if your best setups come from support/resistance plays, make support/resistance plays.  If you crush the London session but give it all back during Asian trading, stop trading the Asian session until you understand what it takes to be successful during that time of day.  If your an ace during the open but aren't quite as good during midday, come up with a plan that lets you do the bulk of your trading in the morning.  There are many ways to be a successful, profitable trader so find your niche and perfect it.

No strategy is complete without a detailed risk management plan.  The best traders making losing trades every single day, yet they still make money.  Why??  They have good risk management skills.  You can start by establishing a maximum amount of your account you are willing to risk on any given trade. This will prevent you from letting one trade ruin your day.  Once you start to develop a deep playbook, you can tweak your risk management plan to allow certain setups to take on more risk.  Your may allow yourself to risk a little bit more on your very best setups in order to set yourself up for a big winner.  Alternatively, you would want to risk less on setups that have a lower probability of being successful.  A daily stop loss is also a good idea so you don't let one bad day ruin your month.  The pros make sure not to give back their hard-earned profits, and the rest of us should follow suit.

Another key is to do your homework.  Research is just as important to a strategy as anything else.  Learn how different sessions trade, how the markets react to different events, which setups work best in certain market environments, ect.  A good strategy is formed when a trader finds their edge and figures out how to exploit it.  Doing good research also allows you to be confident when your trading.  Sometimes it can be hard to pull the trigger, but if you've seen a particular setup happen over and over and over again it will be easier to confidently make the trade.

In my opinion, the two most important parts of any strategy are following your rules and adapting!  The markets are dynamic, ever-changing environments.  Things that worked in the past won't necessarily work in the future, and next year's best trading strategy might not even exist yet.  When the market adjusts, don't be afraid to adjust your strategy too.  Traders also change too.  As you become a better, more experienced trader, you may find different ways to generate alpha.  Adapt, but still follow your rules strictly.  A trader can easily lose their edge and compromise their entire strategy (and account) if they make exceptions to the rules.

Having a good strategy is one of the most important aspects of trading, so if you don't already have a good strategy start working on one!  Good luck and happy trading :).