2Bull Forex Blog

Years ago, I was a limited partner at Bear Stearns and Company in New York City. Once a year, we would have a partner’s meeting, and I would attend as a matter of course. Now keep in mind that we were a trading firm, also a brokerage firm. Back then we didn’t do nearly the amount of investment banking that is done by some of the majors such as Goldman, Merrill, and Lehman Brothers at the time.

What was most interesting however is that we always referred to ourselves as “The Bank”. It’s a strange term when you consider that we were never licensed as a bank by the appropriate federal agencies. Nevertheless, on Wall Street when people were talking about their own specific firms, they always internally talked about “The Bank”.

The reason for this term is quite simple and appropriate. Years ago, if you wanted to know how much money a brokerage firm made all you had to do was calculate interest earned versus interest expense, and you basically had the bottom line, give or take a bit on a pretax basis. When I was s Senior Accountant with Arthur Andersen in the early 1970’s, this calculation was always appropriate, and we dominated banking and finance type companies at that time.

Recently after all these decades it looks like the same technique applies today that applied back then. Most individuals and institutions are still not making the interest they should be making, on the funds they have deposited with brokerage firms. They need to keep a better eye on their funds. The whole issue is the concept of IDLE CASH, and what is being done with it. Back in the late 70’s, Merrill Lynch led the industry with the development of what they called the CMA account which stood for Cash Management Account.

The objective was to go up against the banks both commercial, as well as savings and loan and fight for the cash. What the brokerage firms are doing now is sweeping your idle cash from your accounts on a daily basis and paying you interest on that dollar amount. What are the brokerage firms paying? The answer is probably as little as they possibly can. Recently I saw rates on the order of 1.5%.

What happens is that at the end of the day, the firm checks to see what idle cash is available in your account. It then sweeps the cash and pays you 1.5% on the balance or less. Meanwhile the firm acting like a bank will reinvest your cash over night in its own firm account at a much higher rate. Do these numbers amount to anything?

Would you believe that last year in 2006 Merrill Lynch must have made net, net $2 billion for its own account after paying out lesser amounts in interest to its customers on their idle cash balances? That’s right; they made $2 billion after expenses but before taxes. Is this any way to run a firm? You bet it is. The $2 billion was up from $1.3 billion two years before that. This mean’s the firm is getting better at sweeping the balances, and they are sweeping bigger balances.

Morgan Stanley started getting into the act last year, and Smith Barney which is owned by Citigroup got into the game late by starting up last September with the same technique. When Merrill was quizzed about the practice, they came back and said that the brokers at the firm are encouraged by the firm to discuss “higher-interest options” in order to “meet specific client demands”. Now I own a brokerage firm, and have been in the business for 30 plus years, my answer to that is “SURE”.

The master of this game is Charles Schwab, the discount brokerage house. They were using this technique years before anyone else. Merrill apparently took it from them. Today if you study Schwab’s financials closely, there is no question that they make more money from sweeping the idle cash from their client’s accounts, plus margin interest than they do from brokerage commissions.

Brokerage firms also pay different interest rates on these idle cash balances depending upon the actual balance. The small guy gets hurt, as he always does by having less money to deal with. Balances below a $100,000 usually get the lowest rate which is probably about 1.25% at the moment. The big boys who have over a $1,000,000 sitting in the account can easily negotiate a higher rate by simply picking up a telephone. What the brokerage firm counts on is not getting that phone call.

Since most people with brokerage accounts are always transacting business by buying and selling securities, they are not consciously aware of their idle cash balances all the time. They are thinking about gains and losses, not interest. This is a mistake, because if you are not watching your money, who’s watching it. The guy in charge of sweeping your account, is he watching it? You bet he is, but it’s not your interest he has at heart. His year end bonus is completely dependent upon how much he sweeps, and how little he has to pay you for your own money.

Forget about reading the small print in your agreements with the investment companies. They use language that requires a lawyer to interpret. That’s why the agreements are written by lawyers. The agreements will tell you that the accounts are “tiered”. This means the larger the balance, the more interest you will get. Now how are you supposed to know that?

Wachovia which owns the old Prudential broker network waits until the fourth paragraph of their customer agreement to tell you that Wachovia “may seek to pay as low a rate as possible.” This reminds me of the time that I was talking to a General Motors engineer about how much the jack cost in the trunk. His answer at the time was a”50 cents”. I said you got to be kidding, are you telling me that my life is dependent upon a 50 cent jack when I get a flat tire in the middle of a winter night. His answer was “Yes, 50 cents is what we pay.” As I walked away, he yelled, “Do you want to know why we only pay 50 cents for that jack.” I said sure, why? He said, “Because we can’t get one for a quarter.”

Be careful what you do with your cash, who’s calling the shots on it.

One of the more popular trade setups in forex trading is to trade the bottoms of the currency market.

The question to be answered is this : ” How do we know that a bottom is occurring or has occurred?”

To track the currency move by charts, we will usually look at the bar chart or the candlestick chart and its various bottoming formations.

Here are some common signs to watch out for during market bottoms.

1. The chart must show successive lower highs and lower bottoms to confirm a downtrend is in place

2. At the bottom of the market, there is usually a hammer pattern formation in the candlestick chart, an inside bar, a long legged doji or a morning star formation on the candlestick chart.

3. In volatile sessions, at the ends of downtrending markets, there can be an exhaustion gap where the price of the currency will have gapped down under selling pressure.

4. If you use dynamic analysis of time and price, there is usually a time day or a confluence of time clusters lying near to the bottom formation, showing the possibility of a significant event, such as a change in trend.

5. If you use momentum indicators, there will be a decceleration of downward momentum towards the end of the downtrend and where a possible rebound is possible.

Technical chartists may look out for an outbreak above the high of a bollinger band drawn into the currency price chart where it is usual for the bollinger band to have constricted at the bottom. This is additional confirmation of the market bottom.

While charting helps to pinpoint the possible bottom, it is very much trade management that is important to ensure you are protected in case the trade goes against you. At the same time, it is trade management that will pre-determine the level at which you will take your profits. So build into your trading system principles of trade management - stop loss and profit taking.

Master certain trade setups such as trading at the breakout, trading with the trend and trading at tops and bottoms and you will find a lot of opportunities to make profits when you trade.

Wouldn’t it be great to be financially secure–to never have to worry about money?

What would it take to get there? In fact, what exactly is financial security?

Ask 10 people to define how much money it takes to attain financial security and you will probably get 10 different answers. For some people, financial security is having $10 million in the bank. For others, it’s $50 million.

I doubt anybody would say $1 million. Being a uni-millionaire isn’t what it used to be. With the median home price in the United States around $220,000 (the median price in my hometown, Seattle, is pushing $425,000), there may not be much left after paying off the mortgage. Even having the full million in the bank earning 5% per year will only produce an income of $50,000 per year. That’s not bad, but not enough to jet around the world and party with Paris Hilton, Mick Jagger, and Diddy.

What about $10 million? At 5%, that will generate an annual income of $500,000–without working. Now we’re talking some real money!

The problem with defining financial security in these terms is that having $10 million, $50 million or even $1 million is a pie-in-the-sky dream for most Americans. We’d all like to have millions of dollars, and it’s not bad to aspire to that goal. The problem is, if we define financial security by such large amounts of money, most of us will believe that it’s out of our grasp. Instead, we should use a realistic definition of financial security that can be achieved whether somebody makes $10,000 a year or $1,000,000.

First, let’s look at what financial security is not.

Financial security isn’t making or having a certain amount of money. There are many people who have made millions of dollars who are not financially secure. Stories about musicians, superstar athletes and multi-million-dollar lottery winners who end up in bankruptcy court are so common that they’ve become a clich. If someone makes $500,000 a year, but spends $600,000, are they financially secure? Of course not.

Financial security also isn’t limited to being independently wealthy, having servants bring you martinis by the pool, and flying your private jet to Monaco to party with heiresses, super-models, and rock stars. If that’s what you want, then go for it, but this is a very narrow definition of financial security.

I prefer a broader definition, one that puts financial security within the reach of anybody with a desire to improve their financial situation, and a little bit of discipline.

To me, financial security consists of 4 things:

1) Being debt-free

Consider two women:

Jill: Makes $35,000 a year. Has $250 in her savings account. Owes $10,000 on her credit cards.

Joan: Makes $35,000 a year. Has $10,000 in her savings account. Owes $250 on her credit cards.

Which woman do you think feels financially secure? Which sleeps better at night?

Certain debt is understandable. Few people have the money to write a check for a car or a house. Borrowing money for an education or to start a business may also be acceptable, but borrowing money for other reasons is probably a mistake.

How many of you are still paying off the credit card debt for:

- The vacation you took last summer? - The elegant, romantic Valentine’s Day dinner last February? - The pair of expensive Italian shoes you just gave to Goodwill? - Christmas presents your kids no longer play with? - Electronic equipment that has since become obsolete?

When you owe somebody money, they have power over you. You go to work, even if you don’t want to, because you have to pay back your debt. If you don’t pay, you can be sued, your car can be repossessed, or your house can go into foreclosure. That doesn’t sound like security to me.

2) Being in control of your expenses

As I mentioned earlier, if you earn $500,000 a year, but you’re spending $600,000, you’re on your way to the poorhouse. If you control your expenses so that they are less than your income, you can save and invest the extra money, and you’re on your way to becoming financially secure.

3) Consistently increasing your savings/assets/net worth on a monthly basis

Most people have little to show for years or even decades of hard work. For whatever reason, they can’t or won’t save money and they’re one paycheck away from being destitute.

We should focus on saving money every month. It’s a great feeling to watch your savings grow, especially because the interest compounds without any extra effort from you. Instead of you working for money, your money can work for you.

4) Not being forced to work at a job you dislike just to pay the bills

Many people live paycheck-to-paycheck and are stuck at jobs they don’t enjoy because they have to pay their bills. If they quit their jobs or were laid off, it wouldn’t take long before they were in dire financial trouble.

If you are debt-free, control your expenses, and focus on increasing your savings on a monthly basis, you can survive tough times, such as a layoff, for months, or even years, without a change in your lifestyle. You will also have the freedom to quit a job you don’t like and take your time finding a new job, preferably one that you will enjoy.

Financial security is an admirable goal for which we should all strive. However, it’s important to define financial security so that it is achievable for the average American. Being debt-free, controlling our expenses, increasing our savings every month, and doing what we love can lead to happy, fulfilling, and prosperous lives for us all.