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

How To Bounce Back After Getting Hit By a Bus

Boris Schlossberg — Fri, 03 Feb 2012 12:49:07 +0000

“Everybody having fun yet?” I tweeted the other day. “Between Wen and Junker its like shades of 2008 $EURUSD”. This past Thursday the euro managed to spike to within a few pips of 1.3200 only to drop like a stone a few minutes later crashing though 1.3100 on some negative comments regarding the never ending Greek restructuring talks.

For traders caught in the middle of this price action the volatility felt a bit like being hit by a city bus. If you were unfortunate enough to chase both the tops and bottoms of Thursday’s move you would have been stopped out twice getting a very nasty little slap from the market.

In real life getting hit by a bus hopefully never happens, but in trading FX it is a regular occurrence which is why you have to take it in stride. Currencies are a news driven market and on any given day, at any given time, anything can happen which is why it is extremely important to keep two things in mind. One, don’t lose your cool no matter how bad things get. Two, ask yourself if the loss was preventable or not.

The events on Thursday were clearly unanticipated and therefore not preventable. I was fortunate enough to avoid all the turbulence but just a week prior I wasn’t so lucky. First I managed to sell ten times the amount of EUR/JPY that I wanted to because the default buttons on my platform were set up wrong. Then I compounded my errors by trading ahead of the FOMC meeting and got my head handed to me on the anti-dollar move that followed.

Instead of curling up in fetal position as I did in the past, I took a cold, sobering look at my actions and made the necessary changes. First I removed all the currency pairs from my platform with the exception of only those that I always traded. (EUR/JPY was punt and I shouldn’t have touched the pair in the first place). Then I made sure that all the default buttons on my platform were set to my proper position size. Lastly I paid much more attention to the calendar and stayed out of the way of known risks. The result? I went from four losing trades in a row to making three winning ones.

FX trading may look like it is a fast and furious game but it is actually a marathon not a sprint. Sometimes there is just nothing you can do about the vagaries and vicissitudes of the market. But if you want to learn how bounce back after being hit by a bus, you must ask yourself - what can I do better next time?

CNBC Video: My Outlook for Euro

Kathy Lien — Tue, 31 Jan 2012 13:28:03 +0000

Here’s a clip from my CNBC Asia Guest Hosting slot last night. We talked about the EU Summit and my outlook plus levels for EUR

Morons Increase Margin

Boris Schlossberg — Thu, 26 Jan 2012 08:55:51 +0000

An interesting thing happened to my experimental account lately. You remember - the one I blow up every few months or so. Over the past few months that account has not just survived, but has actually thrived performing better than even some of my “real” money accounts.

Last week I wrote that the one key change I made to my trading was to never, ever, ever, ever, ever, ever, ever, ever add to a losing position. That’s certainly been the key to my success over the past few months. But I also implemented another change that may have just as valuable.

For the past 3 months I have set my default trade size at only 2 times leverage. In other words for every $10,000 in the account I trade only $20,000 of notional currency in any one trade. That may seem laughably small to those of you who regularly trade with 20:1 or 50:1 lever factor, but trust me - it has made all the difference.

Trading small has allowed me to recoup from drawdowns with ease since no single trade clips me for more than 1% of my account. Furthermore what most traders fail to understand is that the leverage in your account is determined not by any one position but by the aggregate amount of trades outstanding. Suppose I am long EUR/USD, GBP/USD and AUD/USD at 2:1 lever factor on each. For all intents and purposes that is simply one big anti-dollar trade at 6 times leverage. Now if your default trade size is set at 10:1 leverage you would in effect be levered 30:1 in your account at that particular time! And novice traders wonder how is it that they lose money so fast!

Amazingly enough low leverage has not hurt my performance one bit. I am up 8% since the start of this year and I am up about 37% since my last orgy of averaging down in mid October. Trading small has not stopped me from making money because I trade frequently, and as I’ve explained in the past, you can get the benefits of leverage two ways - you can borrow a lot or you can turn over your inventory several times per day. The former will almost always send you to the poorhouse in the end. The later is how you grow your account with minimal risk.

So next time you are looking make money by increasing your margin, just remember the title of this column.

Losers Add to Losers

Boris Schlossberg — Fri, 20 Jan 2012 08:58:30 +0000

“I got a horse right here, his name is Paul Revere and here's a guy who says if the weather's clear, can do, can do. This guy says the horse can do. If he says the horse can do, can do.” - Guys and Dolls.

I’ve been killing it in Flow lately and my real account is up very nicely over the past few months as markets have been very kind to momentum trading. But I am not foolish enough to believe that the streak will last indefintely. Drawdowns are part of the game and they will come. There is however one aspect of my trading that I am especially proud of - my experimental account is back above its funding mark.

Those of you who follow my writings know that I am an ardent believer in trading two accounts. One for your real money, where you follow all your trading rules assiduously, the other for your play money where you can go hog wild with your trades with the only caveat being that you try to stay even on your equity.

My experimental account has been decimated more times than I can count, almost always because I’ve added to losing positions as I fought the tape, only to suffer massive losses when markets continued to move against me. However, an interesting thing happened over the past several months. I simply refused to pull my stops, add to any losing position and just accepted every stop without argument.

My experimental account went through weeks of doing absolutely nothing as losses offset wins in a financial equivalent of running in place. To an untrained eye I was just spinning my wheels, but actually without even realizing it, I learned how to stabilize the account. After a few months, my trade selection became sharper and slowly but surely I was able to bring the account back above its starting equity and beyond.

In short, I stopped making wild bets and started to make targeted trades, but most importantly I stopped adding to losers. This one single modification in my trading behavior made the difference between winning and losing. Think about that next time you are tempted to fight your stop.

What EZ Bond Yields Imply About S&P Downgrades

Kathy Lien — Thu, 19 Jan 2012 17:19:14 +0000

Since Standard & Poor’s cut the ratings of 9 Eurozone countries, the euro has done nothing but rally. One of the main reasons why the EUR/USD has been so resilient is because the downgrades had very little impact on European bond yields. French and Spanish bond yields have increased but by less than a tenth of a percent while Italian bond yields decreased since the S&P announcement. The following table compares the 10 year bond yield and 5 year CDS spreads of key EZ nations today vs. before S&P’s announcement. Five year credit default spreads rose, representing an increase in risk premium but the uptick was nominal. The biggest consequence of sovereign downgrades are higher yields and borrowing costs but based upon 10 year bond yield spreads, troubled European nations have been spared from Armageddon for the time being.

CNBC Video: Whats in Store for Euro

Kathy Lien — Fri, 13 Jan 2012 13:15:47 +0000

Talking euro on CNBC Asia last night

CNBC Video: Whats in Store for Euro

Kathy Lien — Fri, 13 Jan 2012 13:15:47 +0000

Talking euro on CNBC Asia last night

How Much Do You Want To Make?

Boris Schlossberg — Fri, 13 Jan 2012 08:30:22 +0000

One of my favorite traders of all time is Paul Tudor Jones. In a business that destroys most money manager within three years he has survived for more than thirty trading on nothing more than his wits and an iron-clad risk discipline.

In an interview with Jack Schwager a long time ago Mr. Jones offered a very simple formula for success that we should all adopt. Ha said that traders can consider themselves successful if their drawdowns are no more than one half of their valley to peak gains. Put simply that means if your account has increased by 1000 points over say a course of 3 months then you cannot give more than 500 points back to the market if you want to maintain long term success.

I love the simplicity of this idea because it eliminates a massive amount of unnecessary math and provides a realistic business plan for trading the markets. It also creates a proper set of expectations. Want to make 100%? Then be prepared to lose at least 50% of your capital. Think about that for a second. This is a formula for success - not failure - and yet it shows that even under the best of circumstances we must be willing to lose half of our money if we want a chance to double it.

This rule of thumb is particularly important to FX traders who regularly use high levels of leverage because it helps explain why most traders fail miserably. If you ask traders what’s the maximum percentage of capital they are willing to lose most will answer no more than 20%. Yet the reality is that if you are trading on 10 times leverage and are shooting for 10% cash on cash return (which at 10:1 lever factor translates to 100% gain or a doubling of your account) then you should be happy to lose only 50% of you stake. Of course no one is happy to lose 50% yet everyone wants to double their money and therein lies the problem for anyone who trades speculative instruments.

The answer to how much do you want to make depends on how much are you willing to lose. If you don’t have a realistic assessment of risk before you put your capital in play you will never succeed in trading.

What are Central Banks Expected to do in 2012?

Kathy Lien — Tue, 10 Jan 2012 23:14:37 +0000

The New Year has begun and it is important to see what the market is pricing in for central banks this year. As you may know, central bank rate hike expectations change often but as of last week, most central banks are expected to keep monetary policy unchanged in the coming year but one is expected to ease aggressively. Find out who below!

Federal Reserve - No Changes in 2012

European Central Bank - Possible 25bp Cut before Year End

Bank of England - No Changes in 2012

Bank of Canada - No Changes in 2012

Reserve Bank of Australia - Aggressive Rate Cuts this Year, 25bp by March!

Reserve Bank of New Zealand - No Changes in 2012

And here are the details!

FOMC Voters 2012 Dove Hawk Scale

Kathy Lien — Tue, 10 Jan 2012 22:59:12 +0000

The Federal Reserve’s Open Market Committee changes dramatically in 2012. Gone are Evans (the most dovish member of the FOMC), Fisher, Plosser and Kocherlakota (the Trio of hawks) and in comes Lacker, Pianalto, Lockhart and Williams. Three hawks and one dove will now be replaced with three doves and one hawk. We can only imagine what this means for monetary policy in the coming year. Every piece of good data will be looked at with skepticism and the central bank as a whole will be more introduce another round of quantitative easing than to normalize monetary policy.

Here is the updated FOMC Voters Dove Hawk Scale for 2012

Jeremy C. Stein and Jerome H. Powell have been nominated by President Obama to fill the 2 vacant seats on the Federal Reserve’s Board of Governors but they still need to be confirmed by the Senate who do not return to business until Jan 23rd.

Here’s where the current voters stand:

Openly Dovish
Cleveland Fed President Sandra Pianalto

Moderately Dovish
NY Fed President William Dudley
Vice Chair Janet Yellen

Slight Lean towards Dovishness
Fed Board Member Daniel Tarullo
Fed Chairman Ben Bernanke
Fed Board Member Elizabeth Duke
San Francisco Fed President John Williams
Atlanta Fed President Dennis Lockhart

Neutral
Fed Board Member Sarah Raskin

Slightly Hawkish
Richmond Fed President Jeffrey Lacker

Here is the FOMC Rotation for the next few years:

Source for both charts is Fixedincomelive.com