Risk Aversion

There is a lot of talk about "risk aversion" in the financial markets these
days. It appears that when the markets go into free fall, risk aversion is
associated with the cause. Take this article as an example:

"SYDNEY, Jan 21 (Reuters) - The Australian dollar was on the defensive on
Wednesday after sliding to six-week lows as mounting concerns about the
global banking system hammered equities and drove extreme risk aversion..."

The following excerpt from Wikipedia explains what all this talk is about.

Risk aversion is a concept in economics, finance, and psychology related to
the behaviour of consumers and investors under uncertainty. Risk aversion is
the reluctance of a person to accept a bargain with an uncertain payoff
rather than another bargain with a more certain, but possibly lower,
expected payoff.

The inverse of a person's risk aversion is sometimes called their risk
tolerance (for a more general discussion of the concept, see risk).

Example:

A person is given the choice between two scenarios, one certain and one not.
In the certain scenario, the person receives $50. In the uncertain scenario,
a coin is flipped to decide whether the person receives $100 or nothing. The
expected payoff for both scenarios is $50, meaning that an individual who
was insensitive to risk would not care whether they took the certain payment
or the gamble. However, individuals may have different risk attitudes. A
person is:

• risk-averse if he or she would accept a payoff of less than $50 (for
  example, $40), with no uncertainty, rather than taking the gamble and
  possibly receiving nothing.
• risk neutral if he or she is indifferent between the bet and a certain
  $50 payment.
  
• risk-seeking (or risk-loving) if the guaranteed payment must be more
  than $50 (for example, $60) to induce him or her to take the certain option,
  rather than taking the gamble and possibly winning $100.

The average payoff of the gamble, known as its expected value, is $50. The
dollar amount that the individual would accept instead of the bet is called
the certainty equivalent, and the difference between the certainty
equivalent and the expected value is called the risk premium.

Buying on Dips and Selling on Rallies

In an uptrend, a trader would want to wait for a pullback/retracement to a low, a level of support, and then go long (back in the direction of the trend) with their stop placed just below a recent level of support. This would be referred to as "buying on dips". The oscillator that you mention, could be used to time the entry. For example, entering an uptrend off of a pullback, the trader could use Stochastics as it came from being below 20 and moving above 20 as a sign that momentum would now be in the direction of the trade.

In a downtrend, the strategy would be reversed and we would "sell on a rally".

Take a look at the chart below for a visual...


The USDJPY pair is in a downtrend on the chart so we would only be looking for selling opportunities. Each time the price action moves back up/retraces within the overall downtrend, it would be another opportunity to sell the pair. The stop would be placed perhaps 20-25 pips above the highest point that the pair had traded on that particular upswing.

Also note on the chart below how MACD shows crossovers to the downside indicating that momentum is behind each of the selling opportunities on the chart.

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Source: Richard Krivo, Power Course Instructor (strategist@dailyfx.co)

Trouble for the AUD and NZD Currencies

Both AUD and NZD currencies are dropping like dead flies, after experiencing weak economic data and wide expectations that there is more bad news to come, read the full story at:

http://www.bloomberg.com/apps/news?pid=20601083&sid=aywg4bFoMxdw&refer=currency

Good riddance to 2008, the worst year ever

Allison Jackson | January 01, 2009

Article from: The Australian

THE Australian share market yesterday ended its worst year ever with investors looking back on losses of more than $700 billion.

Some maybe hoping that 2009 _the Year of the Ox in the Chinese zodiac_ will strengthen the market, which fell 41.3 per cent in the past year.

The Ox is meant to symbolise patience and inspire confidence.

While market participants are not expecting a stampede of bulls to drive shares higher, they are hoping the oxen trait of strength will bring an end to the worst financial crisis since the Great Depression.

``We would believe in anything at the moment,'' a weary institutional sales trader said yesterday. The benchmark S&P/ASX 200 ended the year in positive territory, rising 68.1 points, or 1.9 per cent, to 3722.3, paring losses for the past 12 months to 41.3 per cent, or about $680 billion.

The broader All Ordinaries rose 67.9 points to 3659.3, taking losses for the year to 43 per cent, or $718 billion _ the worst annual percentage fall in the history of the Australian share market.
Almost half of that was lost in the last three months of the year following the collapse of US investment bank Lehman Brothers in September.

The Australian dollar closed locally at US69.08c, down 30 per cent from the July 15 peak of US98.49c and 21 per cent lower than the start of the year.

In a year most people would rather forget, 536 companies fell while only 41 finished higher.
Among the leading blue chip companies, BHP Billiton rose 2.7 per cent to $30.44 yesterday, paring its annual fall to 24 per cent after walking away from its takeover bid for smaller rival Rio Tinto.

Rio rose 2.6 per cent to $38 for a loss of 71.6 per cent since the start of 2008.

A solid finish among the Big Four banks trimmed losses over the past 12 months to between 39 per cent and 51 per cent amid concerns over their bad debt exposures.

Telstra finished the final session of 2009 higher at $3.83, but was down 18.3 per cent for the year after the federal Government dumped the telecoms giant from the bidding process to build the high-speed national broadband network.

Big losses were felt in stock markets around the world as investors cashed in their shares and sought shelter in safe haven investments such as government bonds and US dollars.

What started as a sub-prime lending crisis in the world's biggest economy in August 2007 has morphed into a global financial and economic disaster.

Despite the doom and gloom hanging over the global economy, some market participants believe they can see light at the end of the tunnel.

Eight senior analysts by The Australian forecast that the All Ordinaries would rise by an average 20 per cent in 2009 and oil would climb back up to $US62 a barrel after trading around $US30.
Their average estimate for the Australian dollar was US72c.

Most of the gains in the share market are expected to come in the second half of the year.
AMP Capital Investors chief economist Shane Oliver said he expected shares to remain volatile in the first six months as investors digested more grim economic data.

``We are yet to see the rise in unemployment that the rest of the world is seeing and we are yet to see the full impact of the China downturn,'' he said.

``Economic news will be getting worse before it gets better and we will tip into a mild recession, I would expect.

``But in the second half of the year we will be starting to see signs that the worst is over and that should start to provide a bit more confidence for share markets.''

Dr Oliver expects the share market to rally to 4500 by the end of the year and history is on his side.

The debt-laden Babcock & Brown won the unenviable title of worst-performing stock of 2008, while two of its funds Babcock & Brown Power and Babcock & Brown Infrastructure ranked in the top 10 worst-performing stocks.

The three companies recorded falls more than twice that of the broader market.

Despite the annus horribilis, some companies managed to record performances that would be rated exceptional in any year.

Linc Energy surged 162.5 per cent to $1.995, pipping AGL Energy and Origin Energy for the title of best-performing company in the top 200 index of 2008.