About Shawn Lucas

Shawn Lucas is the founder and fund manager at Apiary Fund. He began his career as a broker for Fidelity and Charles Schwab where he worked the trading desk and processed orders for high net worth investors. An expert in the field of technical and economic analysis of the financial markets, Lucas has since established his reputation as a thought leader and guest speaker for several financial companies including Reuters and TD Ameritrade. He has traveled extensively throughout the world providing lectures, training, consulting, and expert testimony to companies and individuals on the art and science of financial analysis. Lucas has authored sixteen books and studies on the use of technical and economic analysis in stock, option, and futures trading. His simple and methodical approach to the markets has helped thousands of investors better understand and improve their performance and profitability in the financial markets.

Author Archive | Shawn Lucas

Why Are Commodity Prices Falling?

Commodity prices are falling. Fast. But why are commodity prices falling if they’re already at five year lows?

Commoditiescrop

It’s not unusual to see seasonal downswings in commodity prices during the summer months, but the magnitude of this past week’s move is so broad that it’s not seasonal but macroeconomic factors leading the charge.

The movement clearly illustrates the relationship between the dollar, interest rates, and commodity prices. Interest rates are increasing.  Dollar is strengthening. Commodity prices are dropping.

The theory behind the movement is that when the Fed “prints money,” the money flows into commodities and pushes prices up – and alternatively prices fall when money becomes scarce.  But what, exactly, is the mechanism that causes this relationship to exist?

Increasing interest rates decreases the price of commodities in four ways:

  1. It increases the pace at which commodities are produced by increasing the incentive for extraction today rather than tomorrow.
  2. It decreases the producer’s desire to carry inventories.  Storage costs increase.
  3. Institutional investors shift investment out of commodities (high risk) and into treasury bills (low risk).
  4. Strengthens the domestic currency, which, in effect, reduces the cost of globally traded commodities.

Right now, monetary tightening is widely anticipated in the US, with the FOMC signaling that they will likely raise short-term interest rates sometime this year – most likely September. It’s not seasonality or an actual change, but the expectation of a rate increase that’s pushing commodity prices lower.

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Currency and Your Wealth

Eastern Europe and the old Soviet bloc during the early 90’s is a perfect example of what happens with extreme fluctuation in currency valuation.

Hungarian ForintDuring that time, there was a great interest in the value of currency.  Everyone, from the butcher to the beggar, was talking about money. I recall walking down the streets of Budapest when a beggar asked for some money to buy bread.  Having been taught by a mom who insisted I help a person in need, I reached in my pocket, pulled out some Hungarian forint, and placed them it in her hand.

I will always remember what happened next.

She looked at the coins, and in complete disgust, spat in her hand and tossed the coins in the street while she murmured some vulgarity about the “worthless” government.

At the time, Hungary was suffering from hyperinflation – a condition where the price of goods and service steadily increased while the value of the Hungarian forint dropped. Nobody wanted Forint because the longer you held it the less it was worth!

There is a great lesson in this…  Storing wealth in currency is a risk.  Yes, you’re parents always taught you to open a bank account and save your money.  While most of the time that is a good practice, there are times when a currency’s value changes.

Wealth is something we’d all like to build.  It is something that we’d like to save once we acquire it.  Wealth is stored in different ways, such as a savings account at the bank, but how you store wealth is just as important as acquiring it because contrary to popular belief, money is not free from risk.

In Hungary, the value of the currency dropped – nobody wanted forint – and so any wealth stored in the form of savings in a bank account was destroyed.

There was an alternative, however; German marks.  While the Hungarian Forint was dropping the German Mark was going up!  Anyone who stored their wealth in German Marks, not only preserved their wealth but expanded it!

Hopefully with this example, you can see how important an understanding of currency is to your wealth.  If you want to be wealthy, you have a couple of hurdles you have to overcome…  First is how to create it, and second is how to store it.  Both are easy to overcome if you understand how currency works and the Apiary Fund is here to help you get over those hurdles!

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Trading the Summer Doldrums

I am sitting here remembering how much I loathe trading the summer doldrums.  A few minutes ago I received a text from the Apiary Fund development team asking me to place a few live execution trades through one of our new liquidity providers.  It is about 4:46pm Mountain Time and there is nothing happening.  The chart is so flat it makes the Utah Bonneville Salt Flats look like mountains!  And trading is so slow that I’ve started keeping track of which comes first; a new tic or a new minute.  So far the minutes are in the lead!

Welcome to trading the summer doldrums.  The doldrums are the period of time between close of the US market and the open of the Asian market when even sleep takes a nap and nothing happens in the currency markets.  And if you thought the doldrums were bad, then the summer doldrums take it a notch slower!  Summer is notoriously slow as traders take a break from trading and head out on vacation!

While most internet company’s in the world look at midnight to perform maintenance on servers and so forth, in the currency markets we use the doldrums.  Its a time when many brokers perform some of the mundane tasks such as calculating your carry interest.

When you trade currencies you borrow money in one currency to buy a different currency.   You have to pay interest on the money that you borrow.  Fortunately, you get paid interest on the currency that you buy.

If the interest rate of currency you borrow is greater than the interest rate of the currency you bought, then you’ll end up paying the broker a little bit of interest.  If the opposite is true and the interest rate of the currency you bought is greater than the interest rate of the currency that you borrowed, then instead of paying the broker, the broker will pay you!  Which is good, because sometimes that’s the only money you’ll make during the summer doldrums!

As for me right now, I suppose I’ll just have to wait for Aussie’s to stir things up a bit!

Happy Trading,

-Shawn

 

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What Are The Costs To Trading Forex?

While there are many costs to trading forex, most costs are categorized in three ways:

Explicit Costs, Implicit Costs and Optional Costs

choices opportunity cost decision

Explicit costs: are the fees your broker charges. Examples of explicit costs include commission, spread, margin costs, account and management fees, software fees, and data fees.

Implicit costs: are costs that are not charged by the broker, but by the market. For example, a losing trade could be considered an implicit cost. Other implicit costs include slippage, gaps, opportunity costs, etc.

Optional costs: are just that – they’re optional – they are services that may help you make better trading decisions. Optional trading costs include education, better technology, newsletters, trading systems, or advisory services.

As with anything, trading costs can get expensive. However, it’s not necessary to pay high costs while trading.

For example, to beat the high explicit costs of trading, take time selecting a good broker: be selective and do your homework. Brokers can be tricky at masking fees, so there is no better way to understand the true cost than by opening a small account and testing them out.

Implicit costs are kept in check by improving your knowledge and trading skills. Take time to develop your skills: observe, practice, and learn.  Companies like the Apiary Fund provide excellent education and skill development training to mitigate your risk and costs while you’re developing your skills.

It’s important to know that there will always be costs to trading forex. These costs should not discourage you from trading, but encourage you to be a better trader. The benefits can far out-weigh the expense if you’re willing to be careful, and understand the costs before you dive in!

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Greece Financial Crisis Explained

With all the financial news focused on a looming Greek debt default and the pundit’s myriad forecasts of apocalyptic consequence, it might be easy to forget that Greece is celebrating it’s 6th anniversary of this current debt crisis.Parthenon

In this post, I’d like peel back the layers of hype about the Greece financial crisis, and look at the root of the gridlock problem.

 

The question on everyone’s mind is, will Greece will exit the European Union? I personally feel that a Greek exit is a highly unlikely scenario, since there are no clear advantages to either the EU or Greece to separate.  Let me explain.

For the European Union, a Greek exit would be a political nightmare that opens a floodgate of financial problems.  You might think that Greece is relatively inconsequential in terms of its financial contributions to the EU, and that a Greek exit would not have much of an influence on its overall financial welfare.  So big deal, let Greece leave, write off the debt and focus on things that matter most!

The challenge for the EU is contagion.

Allowing the Greek domino to tip starts a chain of reactions in Spain, Italy, Portugal, Ireland and other debt laden members of the EU.  The fight in Greece is a fight for the European Union itself.  While the demands for some level of austerity from Greece seem unfair, it is the only way to keep the EU in tact.  IF the EU softens debt terms for Greece, then it has to soften debt terms for other economically strained countries – putting an enormous burden on the already weak economic union.  A Greek exit is no better.  The EU could probably absorb Greek default, but defaults don’t happen in a vacuum.  The financial burden is not removed – it’s just transferred to other parties and you have no idea where the burden will manifest itself.  Clearly, the EU is stuck between a rock and a hard spot.

For Greece an exit is equally dire.  To exit the EU would mean austerity for the Greek people of the worst kind.  Some people are arguing that Greece should exit the EU, wipe their debt clean,  and start over printing it’s own currency – the New Greek Drachma.  The problem is that if Greece exits, then foreign investment money will be non-existent.  This puts the strain of finance on the Greek Central Bank to issue bonds, buy the bonds themselves, and print money to pay the bonds.  In short – inflation and taxation.  The inflation will destroy pensions and any semblance of wealth for Greek citizens.  In other words, a Greek exit will guarantee the austerity they are trying to avoid by renegotiating debt structure.  Greece’s argument that the debt demands from the EU are too burdensome for their citizens is a weak argument, because its only other option is worse austerity.  Clearly, Greece is stuck between a rock and a hard spot.

So what is most likely to happen next is exactly what has happened for the past six years.  Rescue funding may be given at the last moment to allow Greece to limp along for a few more months while political posturing continues to play out for the media.  Perhaps Greece will default on a payment – just like it did a couple years ago and just like Cyprus did in 2013.  Other political players such as Russia and the US will try to steer the outcome to their favor – possibly offering assistance in one form or another.  Meanwhile, you’ll have a group of bankers and lawyers working behind closed doors to restructure and renegotiate terms in hopes that time and inflation, or better yet, real economic growth will sweep all their problems away.

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Non-Directional Markets

With all the talk about volatility and the dollar strengthening… it appears the dollar stalled out in January, and has gone nowhere since. On January 27, the dollar was trading at 1.13 against the Euro and it’s there again today – the dollar has essentially gone nowhere in 6 months.

What we’re seeing is an extended period of non-directional movement in the dollar. This is a situation where large dollar gains and losses are typical – with the media focusing more on the strong dollar than the weak giving us the illusion that the dollar is strengthening when it is really just drifting sideways for an extended period.

The root cause of the non-directional market is uncertainty. As traders, we understand that the only guarantee in the markets is uncertainty, but this type of uncertainty is different. For example, it’s easy to frame uncertainty during a rate decision – if the rates increase the dollar goes up.  If the rates drop the dollar weakens.  However, the uncertainty of having one fed meeting after another with conflicting economic data is much more difficult to forecast future movement.

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And there is a lot of this type of uncertainty in our world.  Among them is the uncertainty surrounding the Greek debt defaults and the Grexit from the Eurozone.  An exit could bring contagion to financial markets – the extent to which no one really knows.

Geopolitical tensions (such as ISIS, South China Sea, and Ukraine) also make directional bias difficult.  At any moment tensions could flare resulting in greater uncertainty.

Adding to the uncertain cauldron, is the presidential race in the US, where we have an ever-expanding pool of candidates with no candidate showing any real sign of strength.  There is also the dysfunctional relationship between the Whitehouse and Congress, and their inability to settle on any meaningful fiscal policy.

All these factors make forecasting future trends foggy at best.

What do you do in markets like this?  The easiest solution is to use different models.  Fading the outside of the range is an effective strategy.  Reversals will tend to yield better results than breakouts.  Smaller timeframes will still have directional bias – albeit with smaller returns. And taking small incremental profits is better than hitting home runs.

Traders can survive periods of non-direction if we remember the rules are different and it requires a different book of play.  Don’t forget the rule of volatility – the market oscillate from periods of high volatility to low.  We are in a low volatility period so the next move is to an increase…  Clarity on any of the issues mentioned in this article could be a catalyst for that shift and you need to be prepared!
Happy Trading!

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Fear of Failure

A 2014 study conducted by Babson College revealed how fear of failure stops some people from engaging in activities where failure is a possible outcome – including the activity of learning. The study concluded that the fear of failure negatively influences a person’s motivation to learn and their attitude toward learning.A mature business man giving a presentation to some colleagues.

This study has direct implications on the mission and purpose of the Apiary Fund. At its core, the Apiary Fund teaches a person how to manage an investment portfolio – an activity where risk of failure is very real. We accomplish the goal through a progression of classes, simulation, and the eventual management of a small portfolio in live market conditions.

At every step, Apiary works to mitigate the elements of risk and teach a person how to properly analyze and make decisions that include risk. We strive in every possible way to give a person the greatest chance of success in learning how to manage an investment portfolio.

The irony of this study is that when fear of failure prevents a person from engaging in an activity that will make them better, it almost assures their failure in that activity. And when that activity is learning how to manage our finances and investments, the cost of failure can be high! Imagine living your life and avoiding all investment decisions – it is likely to leave you broke for retirement. Imagine giving all those decisions to someone else – it leaves you vulnerable to fraud, mismanagement, and high costs.

We know that many of you join Apiary Fund for the opportunity of trading our money. It is a wonderful incentive – one I wish I had when I was first starting! However, what you really gain through your Apiary experience is a skill and an ability to make intelligent decisions that involve the risk. That is a skill and an ability that has far a greater reach and value in your life than any amount of money you could trade for Apiary Fund!

Happy Trading,
Shawn

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How To Form A Trading Strategy

“Trading System” and “Trading Strategy” are two words that are often used interchangeably, but have two entirely different meanings.

A Trading System is the plan you put in place to accomplish specific goals in the market.  Your trading system incorporates your trading goals, resources, and strategies into a plan to accomplish your purpose in the market.

Most of the time, when people talk about trading systems they are actually talking about a trading strategy.  A trading strategy defines a set of rules you will follow in order to take advantage of a specific opportunity you see in the market.  To build a trading strategy you would follow the following steps:

Step 1.  Define what filters you will use to identify your opportunity in the market.

Step 2.  Create the rules for your setup.

Step 3.  Identify your trigger.

Step 4.  Identify your target.

Step 5.  Identify your stop.

Step 6.  Determine your position size.

Step 7.  Apply any trade management techniques.

Step 8.  Track your results

Step 9.  Review each trading sessions.

Step 10.  Use stats to adjust your strategy.

Here’s what we did this week in our training on developing a successful trading strategy:

On Wednesday, April 1, we walked through the steps to developing a trading strategy.

Then, in the Trading Room on Thursday morning we traded the strategy-resulting in 4 winning and 1 losing trade.

Finally, that night in a class we reviewed the performance and identified a couple of areas we needed to adjust for better performance and better results.

It was a great experience.  Some of you have not had the opportunity of developing a trading strategy and this was a very “hands on” demonstration of the process.  If you want to review the steps yourself, go to the calendar and click on the links from April 1st and 2nd to review the recordings.

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High Probability Trade Qualities

A frequently asked question is, “What is a high probability trade?”

When you sit down for a good trading session, finding a trade setup isn’t that hard-but there are trading setups, and then there are high probability trading setups.  In fact, in any given trading session you’ll only have a few setups with that coveted high probability quality that pays so handsomely!

So what are those qualities in a setup that make it high probability?

We’ve identified qualities of a high probability trade: (In order of importance)

1.     Trend.  Does the trend support the direction of the trade?

2.     Momentum.  Is momentum building or slowing?

3.     Support and Resistance.  Is the trigger above or below support?

4.     Pattern.  Is there a pattern to support the trade?

5.     Volatility.  Is there enough volatility to create a profit?

6.     Time.  Are you at the beginning of a time cycle?

7.     Indicators.  Does your favorite indicator support the setup?

Like a good attorney, you can use the qualities listed above to build a solid case for a high probability trade.  If you don’t have everything aligned, then the probability of successful trade drops.  If your trading setup has these qualities in perfect alignment, then there’s a high probability the trade will work to your favor.

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One Million Reasons Apiary’s Alveo Trading Platform Is Set To Succeed

It happened sometime during the wee hours of the morning on January 26th 2015…

Since it’s official launch in October 2014, Apiary’s new trading platform – Alveo – has officially processed 1,021,602 trades.

Processing 1 million trades is a major development for Alveo and Apiary.  It represents a significant milestone in a project that is over two years in the making.

While MT4 is the industry standard trading platform in the forex market, we realized long ago that the risk of building Apiary’s trading tools on top of a platform that is notorious for changing the rules of the game on a whim was not in our best interest.

During a 6-month period last year, MT4 conjured up over 80 updates to its server or client software. It caused Apiary to be in a constant state of “fixing” broken tools.  The sheer number of hours dedicated to keeping Apiary working on MT4 quickly crossed the line of diminishing returns; couple that with an ever increasing cost structure in both software and hardware resources, and we realized that we needed to make a change – fast!

And so in October 2014, amid pressure from hardware providers, Apiary launched the Alveo trading platform.  However, squaring up with the MT4 Goliath has not been easy.  In fact, the first couple of months were down right rocky.  We found ourselves fighting both a battle of stability (trying to keep the platform stable) and perceptions (trying to maintain confidence in the platform). All while we worked out a major connectivity issue with our liquidity providers.  These issues are not new to financial software, but they are wrinkles that a 10-year head start seems to smooth out.

Undaunted, we’ve trudged forward – fixing bugs, stomping out errors and putting in countless hours to develop stability and connectivity.  However, this time they were hours well spent – hours we know we won’t have to repeat with every new version or update.

While processing 1 million trades is certainly a drop compared to the ocean of trades being processed by MT4, it does illustrate the progress being made by Alveo.

Like a breakout trade that builds confidence, speed, and momentum, Alveo is experiencing a breakout moment. We want to share with the world a million reasons why Alveo is positioned to be a great trading platform, but for now we’ll just stick with the speed, liquidity, slippage, and income earning advantages of Alveo. We are very excited with this milestone that we’ve hit, and can’t wait to see what else Alveo can accomplish.

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