Dollar bulls remain in control with the greenback rising to 3 month highs against the euro and 2 month highs against the British pound and Australian dollar. Traders across the globe are reacting to the more upbeat and hawkish tone from the Federal Reserve by selling equities, selling gold and buying dollars. The only mismatch is in bonds with Treasury yields falling across the board.

Risk aversion is also helping the dollar as Greece's problems prove to be only the tip of the iceberg for the Eurozone. This morning, Standard & Poor's announced plans to reevaluate the ratings of more than 1.46 trillion euros of covered bonds. Lower ratings would deal a further blow to the attractiveness of euro denominated assets.

Philly Fed and Leading Indicators Beat, Jobless Claims Disappoint

Meanwhile, stronger than expected manufacturing activity in the Philadelphia region offsets the decline in manufacturing activity in the Empire State. The Philadelphia Fed survey rose to the highest level since Feb 2005, which suggests that manufacturing sector is still chugging along. Leading indicators also rose by 0.9 percent thanks to an improvement in jobless claims, average workweek, building permits and consumer expectations. The only dark cloud in this morning's report were jobless claims which increased for the second week in a row. Weekly claims rose from 473k to 480k while continuing claims rose from 5.181M to 5.186M. Since the first 2 weeks of the month are survey weeks for non-farm payrolls, there is a good chance that the U.S. economy endured net job losses last month. Dollar bulls may have to wait until January for positive job growth to return.
Bernanke Vote

Finally, the Senate Banking Committee is set to vote on Bernanke's confirmation today. Ultimately he will be confirmed for another term as Fed Chairman but not before a round of heated debate between Senators on the effectiveness of his leadership.

Dollar hit a 3 month high against the euro in Asian session trade today in the aftermath of the decision by the S&P to revaluate the ratings of more than 1.46 Trillion euros of covered bonds. Covered bonds are secured by assets like residential-mortgage loans but remain on a bank's balance sheet, and in the case of a default investors have a claim both on the bank that issued the bonds and the assets backing them.



The S&P move was procedural in nature rather than a response to a new credit threat. Nevertheless, the ratings agency noted that “New risks to the creditworthiness of covered bonds have emerged during the financial crisis. One of the key considerations in our analysis of covered bonds--the ability to refinance or sell assets in the event of a bank failure--can be compromised in a highly stressed environment."

Covered typically carry a shorter maturity than the asset they back, putting the banks at the risk of a maturity mismatch that could create serious re-financing difficulties in times of credit stress in the capital markets.

The S&P news was only the latest credit concern to hit the Eurozone, which has seen the ratings of its member Greece lowered to BBB+ from A- by S&P. Fitch lowered Greece’s rating two days ago. The combination of lingering credit problems in the Eurozone along with a more upbeat assessment of the US economy by the Fed has created a cascade of stop running in the Asian session as first the psychologically key 1.4500 level gave way and then 1.4400 barrier broke as well.

The pair now finds itself at key support level of 1.4400 and may consolidate there for most of the European session given the absence of any event risk on the calendar. Still the sharp selloff has caught many late EUR/USD bulls by surprise and if the US data today proves supportive to the greenback the liquidation by euro longs could accelerate suggesting the possibility of a test of 1.4000 figure before the year end.

Trading psychology is the most important aspect of a trader's success. This may surprise some readers, specifically those that are new to trading. However, the psychological makeup of a trader is more important than market knowledge, market analysis, and even money management. The reason psychology is so important is that even the best information can be distorted by a poor mindset.

Most new traders think the key to profiting in trading is knowing more about the market. For instance, most new traders clog their screens with every indicator they can find, read up on European GDP trends, and feel that pro traders have some sort of secret knowledge. However, this inevitably does not provide the lofty results the novice trader expects to achieve.

After realizing that excessive market information doesn't help (and may hurt) results, the next moment of truth most traders have is money management. Instead to trading 1 lot every time, or even trading the maximum lots their account will allow, these traders realize losses will happen no matter what. When you realize that everyone loses on occasion, it is easy to see why money management is necessary. This is a big step, but does not ensure success.

Now, don't get me wrong, you need to have some form of analysis and some form of money management to profit in the long term. In other words, you need an edge that when applied with proper money management leads to positive returns over the course of many trades. Great money management with no edge will only mean you lose your money more slowly. A great strategy without money management will lead to an inevitable blow up. However, without the proper mindset, it is nearly impossible to continue to get good results in the long run.

The bottom line is that a poor mindset can sabotage even the best trading strategy or money management strategy. I could write about this at great length, but we will look at one key example for now. The biggest test in trading psychology occurs during a drawdown. This occurs when a trader gets in a "slump" and has bad results for a given period of time. Usually the most devastating drawdowns eliminate a significant amount of a hard earned profit.

Keep in mind, draw downs are completely normal. Everyone has them on occasion. However, the key is reacting properly to drawdowns. This is why trading psychology is so important. The natural reaction during a drawdown is to change your strategy. Sometimes traders will even take trades for no reason whatsoever except for a desperate chance at a profit. Assuming you believe your methodology is sound, there is no reason to change anything during a drawdown. In fact, that is the most important time to follow the basics. Think about a baseball hitter in a slump. Sometimes they will change their stance, but usually they keep the same basic stance and swing. Instead, they focus on the fundamentals of keeping their head still, keeping their hands back, and so on. For some reason traders tend to panic in this situation and change everything up. This leads to a larger drawdown, which usually ends when the trader reverts back to their primary strategy.

In conclusion, the steps above illustrate the general process a trade takes on the road to achieving consistent results. Virtually all traders only become successful after they able to put together a strategy that gives you an edge, money management, and proper trading psychology.