Frustrating Day At The Markets

Hola Folks,

It is good to be back writing again after almost a 2 month break! Back from holidays and a weird fever infection, i am back up and running again. Not back to my best yet, but i am definitely getting there. Thank you all for your wishes meanwhile

I had originally planned to start writing again on the 1st week of August, you know the feeling of starting the week and month afresh, but i had a couple of e-mails yesterday that made me put on my writing hat sooner than i had wanted to

I got 4 e-mails yesterday alone stating how frustrating it was trading the market. I cannot agree more. The market has been very volatile with little or no sincere direction and it has been frustrating to trade the moves, to say the least.

For a feel, just of what happened yesterday, here are the numbers. Absolute price movement on;

1) Eur/Usd – 0 PIPS !!! (The open and close price is exactly the same! Should have bought 4D on the price value instead)

2) Gbp/Usd – 5 pips

3) Usd/Chf – 37 pips

4) Usd/Cad – 34 pips

Just to mention a few, but you get the idea.

The question is, what can you learn from such market conditions and more importantly, what can you (not)do that will save you some frustration should such market conditions re-occur again in the future. Quite honestly, there is no reason why they shouldn’t!

Tip #1

Do not trade;

1) If you have hit more than 3 consecutive losing trades for the day.
or
2) If your daily profit target/loss tolerance levels have been hit.

I know that this is easier said than done. However, this is an absolute discipline you must practice. Otherwise, you will always see your account balance shrink faster than it ever grows.

Tip #2

I see that there is always a pattern of traders trading only the majors. At best, they will look at the crosses such as Eur/Jpy and Gbp/Jpy.

Why such a myopic view? Remember that the currency market is the only market that allows you to trade with the concept of pairing and by pairing the currency pairs yourself, you can “create” pairs which can give you more momentum by pairing currencies of diverse polarity in strength, at that point in time. This is an art/study by itself and it can be very rewarding, especially during such market conditions. If you want to know more about this, try googling on “Synthetic Currency Pairs”

Tip #3

Change your trading plan

This is not the most obvious option as you won’t know what is happening at the markets unless it has happened. However, given the assumption that you already know that the market is in a range bound mentality, you can change your trading plan. Here are some options, especially if you are a trend trader;

1) Scalp the market.

This is probably the most easiest and obvious option. With sound money management and hard TP/SL levels, this can prove to be very effective within such conditions. On a day like yesterday, we had a scalping EA give us 4% ROI on our accounts, with just 0.25% risk on each trade. Pretty interesting returns for us!

2) Widen your stop loss and take profit levels.

Since the market will be very volatile within a certain price level, you may widen your stop loss and in turn your profit target level. This is done in expectation that when the market eventually leaves(breaks out) from this zone, your trade will see itself out. This requires better money management and by using dynamic position sizing, you can always stay within your allotted risk level. If you don’t know what these means, it is best to strike out this option. Also, this requires more patience as you may go for days without your trade working out if the market continues to be range bound. The earlier scalping plan might serve you better if you want more results.

Well, that will be all for now. I hope this helps your trading perhaps for today too and for the future.

Happy Trading,
Seeni

Forex Weekly Outlook-Apr 26th-30th

I have to admit. The market condition now is slowly starting to give me the creeps. It is a gut feeling that cannot be justified or backed up with any data or indicators, but from years of experience and dabbling with market psychology, i just get this feeling which cannot be quite explained.

There are extremely over bullish sentiments about the market right now. Considering the jaw dropping recovery that we have had since the meltdown of 2008, market continues to break new odds and spiral its way higher. Though much of these recovery can be credited to availability of TARP funds, QE policies by the various central banks and some aggressive fiscal policies undertaken, there doesn’t seem to be clear vibes of the repatriation of funds. Though the giving has stopped, the growth hasn’t quite stopped. A quick glance at DJIA and S&P500 indices gives us the snapshot that though the strong “V” recovery is indeed happening, we are not quite back to where we were. Regardless, look at the trading volume. There is increased speculative activity than there ever was before the financial crisis when record highs were made.

Am i being paranoid or does this mean something for you?

I mean, just take a look at the recent events we have had;

- Debt crisis in Dubai
- Debt crisis in PIIGS, notably Greece, with still no end to the actual resolution and implementation of the bailout program
- Extremely high P:E ratios, some being more than 1:50!
- Goldman Sachs fraud probe – The way the market totally disregards this news is rather scary
- And we haven’t even started talking about the problems in the US?

I am not sure about you, but it sure does make me feel a little edgy over the whole situaton. I am not asking you to plug out your longs and start shorting the market rightaway. However, keep this skepticism at the back of your mind while you look for new long positions in the market.

So, what happened last week?

Here is a review of how all currencies fared against the USD.

1) Eur – -ve 0.68% (made lower lows since oct ‘09)

2) Gbp – +ve 0.65%

3) Jpy – -ve 2.29%

4) Chf – -ve 0.9%

5) Cad – +ve 1.53% (testing parity for 3 weeks now)

6) Aud – +ve 0.67%

7) Nzd – +ve 1.42%

8 ) Gold – +ve 1.66%

Except for the GBP, all currencies lost strength against the dollar except the com-dollars. We are still holding our position on Cad/Jpy since March. Coupled with yen seasonal weakness and rising Oil prices, this is proving to be a tremendously profitable position.

What lies ahead?

We take a look at the USD index to give us insights to any weakness/strength that could be looming for this basket of measure;

As we have seen for weeks now, the USDx has achieved a very comfortable position above the 80 level and shows no signs of weakness as yet. A break below the 78 level is where we could re-consider USD weakness. However, nothing of that sort looks imminent for now.

Bottomline

With rising oil and gold prices, USD weakness was to be expected. However, this correlation is seemingly getting weaker and weaker. I wouldn’t bet my horses on such correlation as evidently, much of them are being devalued as new market feedback teaches us otherwise.

Technically, I am biased for most currencies having a correction against the USD this week, at least for the first half of this week based on chart patterns given by daily TFs. Most of them gave reversal signals last Friday and will expect new momentum of buyers before going in long. I don’t have a longer term view as yet on most currencies as they all tend to be confined in a range, for now.

Fundamentally, there is much news heading out of Aussie, Kiwi and US land this week. So much is to be expected of the forecasts, especially with FOMC meeting midweek. I will write more about them to you on individual posts.

Stay true to your trading plan, cover your risks and always be happy when trading.

Take Care & God bless,
Seeni J G

Mathematics in Trading – Proven Results or Mythical Belief?

Disclaimer : This article may upset traders and quants and many of those stuck in between. This article reflects my opinion and is in no way meant to be defamatory or critical of any school of thought. If you have a rock solid system that you believe is the secret to trading the markets and need no further guidance, read no further.

What is it?

Over the years, i have always been intrigued by the study of the markets from a mathematical perspective. Indicators, systems, money management and with guidance from the stars and planets even, almost everything these days with the abundance of information and millions of intelligent minds engaged in a myriad of computers called cyberspace, the possibilities are endless.

More often than not, the rationale of numbers can only exist with 2 possible benchmarks;

1) Mathematical validation/justification of the current/proposed study assembled using pre-existing formulas

2) Past Statistics

Ever so often, results in financial trading, with specific focus to retail trading, has always revolved around systems. The composition of a system is often easy. Entry/Exit criteria is defined by a set of rules/filters and perhaps with specific focus towards a currency pair/instrument/timeframe. A more detailed system(note that it need not necessarily be a better system) might include money and order management routines.

Now, what is more difficult is the evaluation of the system. Here is where it gets tricky and perhaps self defeating too at times. Let me explain.

Evaluation of the system will quite naturally require us to test the system against real market data. With strategy backtesting available in MT4 and with many trading platforms giving you easily programmable modular development tools, putting your system to the sword and generating “possible” results of what could have been is achieved within minutes, at most.

The Difficult Part

As most developers will tell you, the first release and its results can be mediocre and may need “some work”. Often more than not, this may involve setting up more filters or tweaking parameters to give the most optimal results over time.

This process is quite simply called Optimization. A less fanciful word is market-fitting, where in simple english, we bend the model to fit what the market has done(often biased towards a specific period which is most congruent with the systems abilities).

Marketing BS or Proven results?

As a system that does best with past market data, it looks great during sales pitches. However, though hindsight “intelligence” is very edifying, can we assume that these models will work as well in the future? Will it even generate the same results within the next 5 years, the next year or even as soon as it starts trading live in the real market?

The Inconvenient Truth

Even with a basic component of a strategy/system as an indicator, the obvious shortcoming is that they all lag. When they have known to perform the way they have all these while, can we know that they will perform the same, more importantly provide the same results, as those achieved in the past?

A simple trip down memory lane during the financial crisis of 2008 will tell us that nothing can be taken for granted. It was just less than 2 years ago we experienced a market condition where indicators were mostly wrong. Currency correlations were all non-existent. Market fundamentals just didn’t make sense. Statistics were pure crap. Martingale accounts simply lost sight of the end of the road. Traders trying to pick tops and bottoms lost their money, pants,(not to mention lots of hair) and of course went into a whole emotional frenzy. Many traders who i know haven’t recovered from the setback yet emotionally, let alone financially. Anyone who has a single mechanical system that did well pre, actual and post 2008 can write to me personally. I have yet to meet one.

“As far as reviews go, it is a wonderful piece of work. It is wise after the event, unfortunately, but hopefully it will enable us to be wise before the next event. ” – Brian O’Kelly, principal of Irish private equity firm QED equity and adjunct professor of finance at Dublin City University.

So, Bottomline is,

My standpoint is, there is an over reliance of mathematical models and statistics to holster our beliefs and trading rules about the market. I have been asked countless times on the trading results and systems that we use about “Can the results be guaranteed?” As always, we are conveniently blessed with disclaimers that make the job easy for us such as “Past results do not guarantee future results”.

More to that than just an evasion of commitment, there is a serious mentality that what works before, should always work in the future. This is called over reliance. I strongly recommend “Fooled by Randomness” by Nassim Nicholas Taleb as a good read to understand what the market can provide. Honestly, as belittling as it might sound, the market is always the omnipresent, ever evolving intelligent being. Whatever, and i mean whatever conditions your system cannot handle or will “suffer” when faced with, will be the exact situation that the market will provide you with. It is only a matter of time. Given such a market condition, can your system tolerate such a period of drawdown?

That is the question you need to answer.

As one of my favourite site always quotes, “On a long enough timeline, the survival rate for everyone(systems/strategies/traders implied) drops to zero”

The bottom line is,

I am not saying that relying on mathematics and statistics is a recipe to disaster. In fact, to the contrary, i strongly recommend it. Given a world of pure random activity and that strongly personified in the financial markets, everyone is capable of coming up with a system. God bless us that without mathematics and technology, we will be down and out in the market even before we know it without proper empirical validation.

However, with increased focus on quantitative analysis, quants and risk managers being paid craploads of money, the emphasis on such validation is ill founded. As a financial institution, driven by capitalist means, how do you drive to provide better yields in an increasingly competitive financial world, yet pay your own experts to justify and validate your own goals who are meant to be your inhibitors of risk?

On the other hand, you being a paid staff(rather well i might add), whose benefits will obviously commensurate with how well the firm’s bottom line has been, will you tell the folks who are paying you to slow down or ramp up knowing that eventually, that will drive their bottomline and yours as well?

All forces have to co-exist with a certain sense of compromise. More often than not, in a capitalist system, it is always at the expense of risk.

“Those who understand well the financial questions that need answering … are often not quantitatively proficient … As for the quants, they love nothing more than having to tackle technically difficult problems … Not only will the pleasure in solving the puzzle be greater, but … the quants’ indispensability to the firm will be further confirmed,”

“So it is not surprising after all that the quant suggesting that a simpler, less quantitative approach should be used to solve a problem is only slightly less rare than a turkey voting for Christmas.” - Peter Bernstein, Against The Gods: The Remarkable Story of Risk.

In my own words, here is my 2 cents of what you can do

1) Rely on these numbers, but do not over rely on them. Always question, what if?

2) Backtest your systems

3) Backtest your systems, with as much data as you can get. We use as much as 10 years data, now 11th year counting to backtest our systems.

4) Find the worst drawdown periods – both absolute and relative. Multiply that by 2 at least to give a worst case scenario.

5) Given point 4, should it happen, imagine that it happens on your first trading day, on your next trade itself.

6) Given all goes wrong, as in 2008, be willing to keep everything you know by the sidelines and approach the market from a fresh new perspective, like you learn trading on your first day looking at the charts. Often, the simple stuff never goes wrong. Once things fall back into “normal conditions”, then re-visit your normal trading rules. An argument of subjective evaluation of these condition beckons, but i think you get the idea

As always, be happy when you trade

Happy Trading,
Seeni

RBA Rate Decision – 6th Apr ‘10

In about approximately 45 minutes, we have the much anticipated Cash Rate decision from Australia being released.

I couldn’t make out much pre-news sentiments on this trade even until this 11th hour, which means that we probably won’t have a clear cut unanimous direction with this trade setup, pre or actual trade setup.

On the background to this release, there is much anticipation that RBA will hike another 25bps to increase its interest rates to 4.25% which will bring it up to 175 bps difference from its next nearest competitor, its sister economy, the Kiwi.

However, experts are split on the opinion for such a decision. Bloomberg did a poll on 23 experts and only 14 were expecting a rate hike as of today itself. Though this slightly weighs in favour of a rate hike, there isn’t a clear speculation in unison of such a sentiment. Also, the charts are showing no such signs of pre-news sentiments building up. To the contrary, aud/jpy and aud/usd have both dropped 60 and 30 pips respectively since market open today.

Therefore, we won’t be taking any pre-news positions on this trade. If there is an interest rate hike as expected, by 25 bps or more(highly impossible but never say no) we could buy aud/jpy. If there is a rate cut(not possible) or a decision to hold(most possible), we might see intermediate weakness in Aud and we can sell Aud/Usd.

Talk more soon, happy trading,
Seeni

Forex Weekly Outlook – Apr 5th-9th

Hello again folks. Good afternoon from lovely Singapore. We hope you have had an excellent trading week and though last week didn’t quite happen according to plan, we saw some very clear trends which provided for easy trading.

We have had some surprise moves especially with the Sterling, but nevertheless, clear trends were visible and it was  a very profitable ride, particularly on that currency. If you had paired it with the Usd, it might have yielded some pretty nice profits(486 pips profit). If you had paired it with the Yen, with its seasonal weakness as highlighted in last week’s post, the profits will have been handsome(586 pips profit).

With our star performer so far, the Cad/Jpy, we have now clocked about 570 pips. Cad/Jpy has now increased about 6.5% since we had opened this position. Based on a single unit, our R:R on this position has now reach about 320%. We have managed this position very carefully since we made a call on this on March 8th and we have added many positions since. Therefore, the ROI on this particular opportunity is now well beyond that level. I hope you did make some profits on this.

So, what happened last week;

Right, getting back to what has happened last week, we did have a fairly “happening” week for a week that hosted the NFP. I tend to believe that lots of profit taking for 1) protection against the NFP whipsaws and 2)closure of the months’ positions proved to set the trends, especially for the Eur and the Gbp.

Here is how the currencies all fared against the USD;

1) Eur = +0.22%
Upside limited to 1.3550, downside will continue once 1.3500 is broken.

2) Gbp = +ve 1.86%
(surprise rally move, clocking almost 500 pips)
Upside limited to 1.5320

3) Jpy = -ve 2.35%
(biggest loser of the week, the seasonal weakness of the Yen has played very well into this performance)

4) Chf = -ve 0.18%

5) Cad = +ve 1.42%

6) Aud = +ve 1.52%
Looking for a break above 0.9250 before considering any long trades.

7) Nzd = +ve 0.06% (movement of only 4 pips)

8 ) Gold = +ve 1.06%
Finally broken the 280 pip trend and strengthening against USD weakness.

What can we infer and what lies ahead?

We have seen a classic case of USD weakness across the board. Now, before you jump in and start longing all majors against the USD, be careful. As i had mentioned earlier, the weak hosting NFP and the month close could have played very nicely to cause these rallies.

We don’t have any fundamental backing on the strengths of these currencies or the weakness of the USD(except for NFP, but the news from everywhere else is far worse off). Therefore, be cautious on going long for we might get sucked back into the dollar strength rally as seen for many weeks prior and there isn’t any reason yet to believe that this trend has reversed.

What is the USDx showing us?

No surprises here.  There seems to be weakness for the moment but nothing to indicate a major trend reversal as yet for we are well far away from 78.00 bearish level.

Bottomline

We should be back to trends prior to last week with $ strength continuing and pressure on Euro and Gbp continuing to push them downwards.

More interestingly, we have seen oil break the $82 level and now trading above the $85 level. It has just roared through that resistance level within the last week alone. With this important price breach, oil might see new highs. This will greatly help our Aud,Cad and Gold positions, especially pegged against the Yen for the moment, till at least about May-June window.

News on the Fundamental front;

Mon – Holiday almost everywhere, except the US (Best not to trade today)

Tue – Aud Cash Rate Statement (Must Trade, expected hike of 25 bps)

Wed - USD FOMC Meeting Minutes
CAD Building Permits
CAD Ivey PMI

Thurs – Gbp Bank Rate
Eur Bank Rate

Fri – Cad Unemployment Change/Rate

Keep your eyes peeled for some major trend setters this week folks. As always, happy trading!

Regards,
Seeni