BK Forex Advisor | Boris Schlossberg | Kathy Lien | Forex Trading Signals

Pedal To the Metal

Boris Schlossberg — Thu, 17 May 2012 10:25:02 +0000

Last week I posted a Twitpic of New York city bus poster that had two pictures of the same face. On one side the face was completely battered on the other it was perfectly preserved. The tag line read, “Hit at 40 mph, Hit at 30 mph” emphasizing the point of adhering to the speed limit in New York city. The ad was stark and very effective communicating succinctly the danger of pressing your luck.

At its core the New York city bus ad was all about tipping points. Press on the gas pedal just a bit more and the result can be the difference between life and death. For me this was perfect metaphor for trading. Most traders never consider tipping points. A small hedge on your loan book can quickly transform into a massive 3.5 Billion dollar loss as JP Morgan found out last week. Even the best traders in the world never fully appreciate the deadly combination of adding to a highly levered position in an unfavorable market environment. US mere mortals in FX land make that mistake all the time.

I think the reason that most traders fall into this trap is because we mistake geometric for exponential progression. In other words we think that any additional unit of risk will simply result in one additional unit of loss when in fact the losses compound almost exponentially as they propagate not only through the new position but through the entire inventory on the books. This was the mistake of the “London Whale”, Nik Leeson, Long Term Capital and many future traders still to come.

In a recent interview with Marc Sidwell, the business editor of City AM he asked me, “What is the worst mistake a trader can make?” To which I instantly answered, “Average down into a losing trade.” It is ironic that I would say that since I am notorious for doing just that in my “junk” trading account. In fact if you look at the trade runs in that account over the past several years the story looks depressingly similar, nice runs up followed by a few swift declines that wipe out most of the equity. Essentially the account looks like a mini version of LTCM.

Until December 8th of last year. That was the final time I averaged down in my “junk” trading account. Lo and behold equity never dipped more than -2% since that time and now stands 10% higher. That’s hardly gangbuster returns, but remember I do a tremendous amount of experimental trades in that account so it’s a miracle that it up even by that much. What’s absolutely incredible is that the “junk” account trade results are testament to that New York city bus ad. Lay off the gas and you’ll stay alive in New York city traffic as well as in your FX trading account.

One Simple Rule to Control Your Daytrading Losses

Boris Schlossberg — Thu, 10 May 2012 20:34:48 +0000

I often drop in on the Elite Trader bulletin boards to see what traders are talking about and this week a thread titled “Why folks lose money daytrading ES” really caught my attention. The poster “gmst” discusses the finer points of trading the e-mini S&P contract, but his insights are just applicable to the FX Market. I liked his post so much, that I am going to replicate it in this week’s column with one personal observation - ever since I limited my daytrading to no more than 2 trades per day in my “experimental” account, I haven’t even come close to a margin call and in fact just hit new equity highs this week.

gmst
Elite Trader
Why folks lose money daytrading ES

I call this rule of 2 trades per day. Newbies or struggling ES traders, do not take more than 2 trades per day, doesn't matter if you win both or lose both how many points you made or lost. This rule has many benefits:

1. Since you are a struggling trader, so it means on average you are losing money or are just breakeven while trading ES. Taking less number of trades per day first means a slower burn rate. So you prolong the time before your capital falls to zero and this added experience increases the odds to eventually succeed at ES.

2. If you are open to take multiple trades every day (say 6-15 or even more round-trips per day), by simple logic - you would be reversing your position multiple times. Do you know why this conclusion follows?

HINT: Answer this: When are 'struggling traders' going to reverse their position? Answer is: Note, by definition you are a struggling trader, so chances are more often than not, you would find your trade in a losing position and thinking that you are wrong on direction, would reverse.

As soon as you reverse, there is a decent chance that price will mean revert and you would find yourself again underwater, thus setting up for reversing again. Vicious circle. Can you see the point? If not, re-read and absorb. This is an important point.

3. Also,being limited to taking only 2 trades per day, you will learn to sit on your butt with your hands tied behind your back, waiting for that opportunity when you are very sure that you see a trade (be it for 1 point or 6 points). This sitting on your hands will teach you patience and result into higher quality of trades.

Above is a generic post applicable to almost all instruments (not only ES) but it is an important post and its easy to underestimate its importance. Struggling traders - you should listen carefully. You will benefit. Good luck.

The Secret To Beating The Market - Chase Price Not Peformance

Boris Schlossberg — Thu, 03 May 2012 20:21:02 +0000

Here is amazing fact. Peter Lynch the legendary head of the Magellan fund made 35% per year running money during his tenure, yet most of the retail clients of Fidelity lost money despite his amazing record. Why? Because most human beings are inveterate performance chasers. They buy when money managers are hot and sell when they are cold effectively destroying any chance of building wealth in the long run.

Ironically enough most traders do the opposite. They double up on buys that have cratered and add compulsively to shorts that are running away from them. A UK publication recently asked me “What is the most important lesson you have learned as a trader?” Buy high and sell higher. Sell low and sell lower. I answered. Yet most traders will never do that.

This, I believe is the primary reason why making money in the market is so hard. To succeed we need to hold two diametrically opposite ideas in our head. As investors we have to dollar cost average into our managed funds accounts. As traders we need to buy strength and sell weakness and quickly get out if the trend turns. In short, we need to learn to chase price, not performance. Yet whether we are a 5000 dollar retail piker or a 50 Billion dollar pension fund we all continue to make the same mistake.

Understanding this one simple irony about the human condition will go a long way towards making all of us much smarter market participants.

Does Sell in May, Go Away Apply to EUR?

Kathy Lien — Tue, 01 May 2012 14:45:50 +0000

There is a very old saying in the stock market that goes “Sell in May, and Go Away.” This pertains to the notion that investors should cash in on their investments this month and take the summer off because June, July, August and September have traditionally been some of the worst months in the equity market.

Over the past decade, this adage has held true. If you were to sell the S&P 500 at the end of May, you would have avoided an loss over the past 10 years. For the EUR/USD however you would have lost out on a gain but selling USD/JPY in May would have been a great idea because the currency pair fell steeply between June and September.

Looking beneath the hood however, the decision to sell in May and go away for the summer is not so easy for currency traders because if you did so in 2009 and 2010, you would have missed out on big gains in the EUR/USD. Between June and September of 2009, the EUR/USD appreciated more than 3 percent and in 2010 it rose nearly 11 percent.

This year, there is a reasonable chance that stocks could continue to fall, leading to more risk aversion in currencies because US data has been mixed and central banks are returning to easier monetary policies. However following seasonality without following stories blindly would be a big mistake.

Look at Australian Economy Ahead of RBA

Kathy Lien — Mon, 30 Apr 2012 18:38:37 +0000

The Reserve Bank of Australia is gearing up to cut interest rates this evening. The market is currently pricing in 32bp of tightening which means that investors expect the central bank to reduce rates by a minimum of 25bp. 50bp is a possibility but given some signs of improvement in Australia’s economy (jobs and construction/services), I expect a more moderate move. Here’s a table comparing how economic data has fared since the last monetary policy meeting on April 3rd.

Stupid is as Stupid Does

Boris Schlossberg — Fri, 27 Apr 2012 10:45:00 +0000

This week an article in the Wall Street Journal went viral in the FX world as it hit a raw nerve with traders everywhere. “The market isn’t wrong, it is just stupid!,” it announced, noting that,”More and more, those who are paid to play–seasoned veteran institutional foreign-exchange traders–are becoming disenchanted with a market that appears to them to be broken.

The new age of currency wars with many governments attempting to keep their domestic currencies weak in an attempt to export their way out of slow growth has clamped down foreign-exchange movements and severely limited traders’ opportunities to make money.”

While I somewhat sympathized with the plight of the bank traders, my first reaction was, “Stupid is as stupid does.” The signature line from Forrest Gump - a great movie that taught humility and showed that intelligent people could often do remarkably dumb things.

When you look at the FX market over decade long horizon or longer you see that currencies always go through periods of high and low volatility. Today’s low vol market is just a natural result of the high vol of the past. The markets aren’t stupid - vol is just mean reverting and furthermore, the range bound trade is far less a function of central bank interference and much the result of market uncertainty. The reason why there are no trends in FX is because G10 economies seem to be a crossroads between doomsday and recovery, with many participants fearing that the Great Recession, much like the Great Depression will have a second act.

In the meantime this may be cold comfort to traders who are being stopped out left and right, but it is also a message that markets are not supposed to provide constant uninterrupted profits. Sometimes the best that you can do is just break even. However, those traders that can contain their losses and keep their capital intact will no doubt be rewarded when the next big move comes along.

Compare the FOMC Statements April vs. March

Kathy Lien — Wed, 25 Apr 2012 16:40:01 +0000

Here’s my marked up version of the FOMC Statement with notable changes.

Compare with:

March FOMC Statement
Release Date: March 13, 2012
For immediate release

Information received since the Federal Open Market Committee met in January suggests that the economy has been expanding moderately. Labor market conditions have improved further; the unemployment rate has declined notably in recent months but remains elevated. Household spending and business fixed investment have continued to advance. The housing sector remains depressed. Inflation has been subdued in recent months, although prices of crude oil and gasoline have increased lately. Longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects moderate economic growth over coming quarters and consequently anticipates that the unemployment rate will decline gradually toward levels that the Committee judges to be consistent with its dual mandate. Strains in global financial markets have eased, though they continue to pose significant downside risks to the economic outlook. The recent increase in oil and gasoline prices will push up inflation temporarily, but the Committee anticipates that subsequently inflation will run at or below the rate that it judges most consistent with its dual mandate.
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.
The Committee also decided to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in a context of price stability.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Sarah Bloom Raskin; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen. Voting against the action was Jeffrey M. Lacker, who does not anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate through late 2014.

Table: How NZ Economy Fared Since March Mtg

Kathy Lien — Wed, 25 Apr 2012 15:39:38 +0000

Aside from the Federal Reserve, the Reserve Bank of New Zealand also has a monetary policy announcement this afternoon. The RBNZ is expected to keep rates unchanged - hard to validate a rate hike when the RBA is planning to ease. Also, the last time the RBNZ met, Governor Bollard said “sustained strength in NZD would reduce the need for further increases in the cash rate.” - So it doesn’t look like rate hikes are in the pipeline until there is more evidence of a recovery. Nonetheless, here’s a table of how the economy changed since the last meeting:

Table: How US Economy Changed Since Last FOMC Mtg

Kathy Lien — Wed, 25 Apr 2012 13:02:01 +0000

Here’s a table comparing how the US economy has changed since the last FOMC meeting in March. More weakness than strength 4 sure…

The Difference Between Winning and Losing in FX

Boris Schlossberg — Fri, 20 Apr 2012 13:37:52 +0000

Want to make sure you wake up on time? Put your alarm clock away from your bed forcing you to get up in order to turn it off. It a simply trick but it works like a charm. Take it fro guy who has had to get up at 2AM New York time for every working day of the past 8 years.

Here is another behavior modification trick to consider. My teenage son, who like all boys has difficulty sitting in one place for more than a minute has been having problems with schoolwork. So I cut his allowance. He in turn proposed that I pay him for homework in order to motivate him. We agreed on a buck per each assignment (hey this is New York), but taking some inspiration from Mr. Market I added the following caveat - any time he didn’t do his homework I would take away a dollar from the ones he had already earned. In short I created both positive and negative incentives. Net result? His butt has been nailed to his desk all week long and all work has been done on time.

I’ve been thinking about behaviour modification as I looked at my “junk” trading account today. Those of you who have been regular readers of my column know that I have blow up lots of money in my spec accounts over the years by martingaling straight into margin calls. However since the start of the year an interesting thing has occured. My junk account has been oscillating a couple of hundred dollars on $5,000 just as I had hoped it would. This despite the fact that I laid on hundreds of idiotic trades as I experimented with various strategies.

What’s been different this time? Two things. One, I preset my standard trade to only 2 times my equity (ie trading on 2:1 lever factor). Two, I auto attach a stop to every trade I make. It been amazing how those two minor behavior modifications have basically kept me alive and trading in my “junk” account, allowing me the experiment and extract the best ideas into my “real” accounts.

Looking at those trade results I realized that in trading as in life it is the process rather than the strategy that determines long term success. Ideas after all are a dime a dozen. Some are great some are horrible some start our great and become horrible others start out horrible and become great. What really matters is how approach the business. We all know that we are just one bad trade away from ruin in FX, which is why behaviour modification is the difference between winning and losing.