Gold: The NazGolds of XAU-ron

We want It, we need It, must have the Preciousssssss - Gollum, the lord of the rings

It was during the dark days of the Recession, a few weeks after the Brothers were killed in the battle of the Mountains of SubprimeDebt. I fell in the Cave of Goldum, a creature that was once, a long time ago, a HotBid called SmeaGold and I managed to take his Precious, gold coins and bars, at below $700 an ounce. I've been carrying the position since and the precious metal has now reached a new all-time high at $1,300. XAU-ron, the Dark Lord of Trading knows I own what used to belong to Him and He wants the Precious back. He has sent 3 of the terrible NazGolds, the dark traders riding roaring war-cars with the emblem of their Master -a black prancing horse on a yellow shield- to take me out from the Position.

In a deadly (financial) battle, I defeated the first NazGold, OneCantGoBrokeBankingAProfit, who had tried to convince me to get out of the trade and take my profits on the way up. After he tried to convince me, unsuccessfully, he possessed the spirit of my Fellow Traders, friends and even my family and every $100, every historical record, a possessed spirit inevitably suggested me to sell: "it's quite high, Sauros, you should sell" and every time my answer was invariably "I can't, it's gonna go up". I was right and I sat tight. I can't say I wasn't tempted, the fact I owned the gold physically probably helped as I'm too lazy to go to the bullion (next to the Savoy on the Strand) to sell it, and sitting tight is easier when you are already sit on a consequent profit and the temptation to sell since the $1,000-level broke has faded.

An update of my favourite chart

I was right, managed to pick up a few years bottom, purchased on the precise day it reached the low and managed to hold it tight but that was not enough: the two others NazGolds hurt and harmed profoundly my Position. I really struggled in the fight against the second NazGold, UDontHaveTheBalls, and he hurt my position as all along the way up from $700 to $1300, I haven't had the fireballs to put on more on it and pyramid as I should have. I did a bit of trading on Gold in 2009, buying and selling on leveraged (10x) positions and made a decent profit, but I didn't let those ones run (too leveraged) and has stopped this year, preferring the stock indices and forex markets. If (only) I managed to build a pyramid on the Gold position... I would probably be a Zillionaire now (and a Zillion quids is a lot, believe me!).

The third NazGold, DiversifyUrPortfolio almost managed to destroy the Position. At that time, I was running the Orc Race and was much younger in the game of financial speculation than I'm today (while I can't say I'm an experienced speculator yet) and was more easily influenced by the servants of the NazGold, financial advisors and other fallacy tellers. The crisis has shown this (at least to me): when there's a systemic shock, everything crashes and all your egg baskets fall at the same time, no way to catch them and you may be better off if you tried to protect only one basket with all your eggs in. At the opposite in bull markets, diversification may just kill your performance: my gold position shows that if you're skilled (or enough) to pick the asset that will outperform the market you may finish the race before the diversified crowd. Here, hit by the NazGold of diversification, I only invested a few percents (around 5 at the time) of my equity on Gold, it means that after all these fights, tears and blood, I end up with only a few percents more on my wealth...
 
To win the War of the Market-Earth, it's not enough to "be right and sit tight", you have to engage all your available forces in the battle and send permanently fresh warriors on the field. If you lose, even in the worst case, the outcome would fortunately be much less dramatic than in a real war, it's just money. If you win, your Quest of the Precious may be accomplished. The lesson of the Gold position has been learned, I'm just standing here, waiting firmly for another opportunity (I may consider to add more on gold now, we'll discuss this in a later post), and when it comes I swear I will give the NazGolds a harder fight. I just hope it was not a lifetime opportunity because, from $700 to $1,300 my Fellow Traders, what a ride!

TLofT be with You   
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Where to Get Physical Gold? Online, in the Cave of Goldum, our online bullion 

Trading under influence

I must create a system or be enslaved by another man's - William Blake

I've found Paris Trading blog!

I'm now enjoying a vacation and the only thing I have to do to monitor my trading positions is to watch the EURUSD go up (it reached 1.3439 today) and to trail my stop loss from time to time so after the beach I have some time to spend looking at other trading systems than mine ... If you remember, Fellow Trader, a few weeks ago as I started to build a position on the USDJPY to bet on a Japanese intervention, I noticed that a lot of technical analysis done by the Asian analysts on the JPY used extensively the Ichimoku Kinko Hyo trend trading charting system. By the time, I'm sure the concepts of Tenan Sen, Kijun Sen, Senkou Span and Chikou Span have no more secrets for you, if they still have, you can still go back to the site I linked the last time (OK OK I've just gone there too...) That system was developed by a Japanese newspaper guy who had slaves that had crunched the system for 20 years to find the optimal parameters. I don't have the time (nor the will) to test the system myself (and I sold all my slaves a while ago to meet a margin call) but at first sight, as for Moving Averages, it looks like (by construction) the indicators are lagging, meaning that the signals triggered by the cross of those lines may come after the action and consequently I wouldn't rely too much on such signals... they may come too late. However I guess that the analysis is self-fulfilling particularly on the Asian markets where it seems to be commonly used and once again like for Moving Averages, I think the lines tend to act as support/resistance and I would rely more on the cross of the price and one of those lines.

A closer examination shows that after all, the Ichimoku lines are just close cousins of our more common Moving Averages, Average True Ranges and Pivot Points, the average of the difference between high and low over the last n trading days (n=9 for the Turning line and n=26 for the standard one) is just another way to smooth the prices in an attempt to reduce the "noise", in a very similar way as a Moving Average does. What I mean is to some extent, whether you believe it "works" or not, the Ichimou analysis makes sense.

Actually there are Trading systems that don't make sense, I mean no sense at all... For instance the blog of a chap who based his analysis upon the Golden Ratio (Phi), Sacred Geometry and the way the planets are positioned. I'm not kidding, here are some extracts :
"I have recently completed a analysis of the S&P 500 using Gann's Square of Nine with accompaning astro-charts. September 8th looks quite interesting--especially if the S&P is at or near 1100-1107. If the market does pivot and reverse in this time frame, September 23-24 may be a VERY dangerous time to be invested in the U.S. Stock markets."
[...] you will see that the spiral cycles align with the planetary conjunct-oppositions AND the pivot points on the S&P 500.

• The conjunction and oppositions took place between 1 and 3 degrees of the Aries (0) - Libra (180) axis.
• If you look on the left side at the 180* Saturn Conjunct Venus position the approximate low on the S&P of 1039.70 is situated there (1040-1041).
• Straight across at the 0* line where Jupiter and Uranus are located the value is the much discussed 1106-1107 level."

If you still don't believe me, you should go directly to the blog. My first reaction (and probably yours too) is the guy trades under influence and I don't refer to a couple of beers... But you know what ? I think that he should make a lot of money, otherwise how could he be able to afford all these drugs... More seriously, if you have a look at his blog, the chap is working pretty hard on it, it seems that he has developed his own system, probably has spent years (I guess since Woodstock in 1969) testing it and certainly lost a lot of money doing so and now the system gives him a framework to trade, regardless of the opinion of the others. And I believe it's what mastering the game of  Trading is about: it's not about finding the right trading system in a book or worse using a plug-and-pray robot, but develop his/her own system over years of trading, test it at a consequent cost of time and money and once developed and tested, just stick to it no matter what happens... There should be as many systems as traders. To quote Schwager in the preface of the New Market Wizards "there are a million ways to make money in markets. The irony is they are all very difficult to find" and I'd add you have to develop yourself one that fits you as what works for me, your friend Bob, George Soros, Livermore or Hillary Clinton (the legendary cattle trader) doesn't necessarily work for you.

TLofT be with You.
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EURUSD: sit tight, it might be for this Time!

"It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight!"-- Jesse Livermore

Once again I quoted above the Holy Reminiscences. Some days, I'm a bit upset that the book is so popular and a trading classic as I wish I was the only one to find an old Grimoire with its text in a forgotten crypt in the middle of nowhere. To me, loads of timeless trading secrets lie inside and Livermore had fully understood the game of financial speculation. Fortunately, even if every serious trader has read it and most consider it as a reference, only a few are able to apply its teachings. The reason of this paradox is that the trading secrets go against our human nature itself that urges us to buy when we should sell and to sell when we should buy. For example, one of the major lessons from the Reminiscences I'd summarize here with the old good "Cut your losses short and let your profits run" is definitely one of the most difficult to apply as well. When our position shows a loss, we are tempted to let it run, hoping for the price to come back in our direction. At the opposite, when it shows a profit we're tempted to take it as we fear it vanishes. The thing is most of the time, the market does "come back" and the loss recovers and most of the time the profit does actually vanish and you should have banked it before. But ONE time, just once, they just won't: the loss will become a huge one and wipe you out, the profit will become a huge one and make you rich.That's precisely the reason why a trading system that generates too many winning deals looks suspicious to me as I know one big loser will inevitably offset all the profits. That's also the reason why when I have a position that starts to show a profit, I'm spending my time to fight against the temptation to close it: it might be for this time, that might be THE trade.

EURUSD Daily chart- the pair is above its 200-SMA

Lately as posted here, I've had two long forex positions showing a profit : one on the EURUSD I initiated at 1.28 and one on the USDJPY intiated at 84 and currently, I'm finding it easy to sit tight because I'm on holidays... Maybe I should take a vacation more often... But actually, the impact of the timing of my holidays is mixed. On the one hand, as I knew I wouldn't be able to actively follow those two positions (without risking a divorce) I cut the USDJPY one, on fear of a US QE2 and that the Japanese intervention may not be enough but mainly by instinct, as I had to close one. As I write, it seems to be a good choice as the FED statement today let the door open to QE Episode II. That sent the USDJPY down from near 86 to 85 and the EURUSD is flying, helped before the FOMC by successful European govies auctions, and has broken the 1.32-bar and is trading now above its 200-SMA, at around 1.3250. But even if now it seems I was right to cut the USDJPY position, even if I think that the pair won't  jump so soon, I might miss the big move and that's a big risk! On the other hand, I'm enjoying now a near 500 pips ride on the EURUSD and I think if the break of the 200-SMA is confirmed the rally still has some room but because of my break, I was not able to pyramid and put on more and more on the position as I would have done normally. Ultimately the difference might be huge, I mean as big as the difference between a good trading year and the instant retirement... Once again, this vacation may be very very very expensive.

TLofT be with You
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Hayek vs Keynes @ DaLordaTradin'

Yo Fellow Traders,
In case you missed it : the rap version of a debate between two economists: Hayek and Keynes... (with French subtitles). I can't wait for Eminem's speech next year at Jackson Hole!


Hayek vs Keynes - VOSTfr

Da LordaTradin' b with Ya...
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USDJPY : the Empire of the Rising Yen strikes back

Depreciate you will

It looks like Master Noda, the Japanese MoF-Jedi and his fellow Jedi knights of the BoJ read my post yesterday and finally intervened to weaken the JPY by buying USDJPY, the first such action since 2004. The intervention was seen to be unilateral, the thing is that the recent move down of the USDJPY was related less to Japanese fundamentals but more to US problems: the Empire of the Rising Yen strikes back! My very personal opinion is it's well done, not sure that the intervention will work and manage to maintain the JPY weakness (see what happened to the Swiss SNB and the CHF), but I think it had to be tried. When the words stopped to work after weeks of threatening of "bold" actions and plethora of suggestions that an intervention was imminent, some real actions was required. What's already granted is that the next time the JPY bulls led by Darth Trader will think twice before betting that "they won't do it because they never do it". I'm now quoting Mitul Kotecha from Credit Agricole CIB in his FX alert after the intervention who IMHO summarized the situation pretty well:

"Now that the door is open, further intervention is likely over coming days and weeks but for it to be effective it will require 1) doubts about US growth to recede, 2) speculation of Fed QE 2 to dissipate, 3) and consequently interest rate differentials, in particular bond yields between the US and Japan to widen in favour of the USD. This is unlikely to happen quickly, especially given continued speculation of further US quantitative easing. A final prerequisite to a higher USD/JPY which is related to the easing of some of the above concerns is for there to be an improvement in risk appetite as any increase in risk aversion continues to result in JPY buying. "

USDJPY intraday Sept 15 : I'm in!

Yesterday, as I was starting to discuss the DJP's election and the Japanese situation and how the country was harmed by the strong JPY, I had to switch to the move of the EURUSD as it jumped to more than 1.30. So I didn't have time to mention that I suspected a strong move up of the USDJPY might happen very shortly. To be honest, I was not really expecting an intervention so soon but I guessed the strong drop below 83.00 was less and less bearable for the Japanese Jedis and mainly the fact that for the crowd the USDJPY would inevitably reach 82.00, triggered a contrarian sentiment in me and I felt like playing the reversal. Last night, before I went to bed (as I was brushing my teeth) I input a buy order on the USDJPY at 84.00 while the spot was around 83. As you can see, I wanted to play the reversal, fine, but I didn't want to try to catch the falling knife and buy at the market, my hands are plenty of scars already... Of course that trade is paying off big time now and as I write, the profit is of around 165 pips. It has already more than offset the loss I made recently on my long position of the same pair. Remember, I was initially betting on a Japanese intervention...

One last thing, I'm on holidays for a couple of weeks. To me, holidays means I will just spend a couple of hours per day watching the markets, instead of my usual 18 hours. At the beginning of the week I had the idea to write that after a long winning streak from January to May this year that led to a performance of +380% (!!!), the previous holidays I had in June cost me dearly as since I'm back, I'm more on a losing streak and I've given a big chunk back. I wanted to conclude that it was high time I left on holidays. But the big winners those past 3 days both on the EURUSD (+176 pips) and on the USDJPY (+165 pips) will probably leave me near the break-even for this negative period. That's how my trading system works, a lot of small losses, offset by a few huge profits, the trick is once at break-even to sit tight in order to be ultimately profitable...

With my holidays, the bad news for You who follow the Eye of Sauros (thanks again for this) is I won't be able to post here daily, I recommend you follow the blog of my Fellow Traders from Analyze Capital  in the meantime (and permanently too), the good news is I will try to update the blog from time to time during my vacation. Now, If you're thinking what I announced as a good news is bad news and as bad news is good one, just change the research engine that brought you here :-)

The Lord of Trading be with You

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FYI As this post is published: SPX 1115 // SX5E 2784 // NKY 9516 // DAX : 6240 // EURUSD 1.2981 // USDJPY 85.67 // XAUUSD : 1267

Japan : Yes You Kan! But can You ???

"Trade First, Investigate Later"-- George Soros

So it's done: in Japan Ozawa the "Shadow Shogun" will stay in the shadow (whether he will remain a shogun or not is another question) defeated by Kan. To be frank, back to a few months ago, I didn't know who those two guys were (Ozawa? you mean Obama, no?) and their party, the DJP, so no need to tell you that I've no specific opinion on the result, politically I mean. Now whether it is good for Japan or not, I'm not an economist (TLofT forbids) and I definitely don't master all their technicalities but for me, considering that the name of the game for a country in these dark times is to "have the weakest currency as possible" has been profitable in my trading so far and I find that Kan has shown so far a weak hand regards to the matter of weakening the Yen. His victory has sent the USDJPY to a 15-Year low this morning at 83.07, despite the strong close of Wall Street yesterday that should have put some pressure down on the JPY as investors may get out from the safe haven, the risk aversion correlation is broken. Irrespective of the election's results, the situation highlights the points of view I have been developing on Japan since the end of last year: among the "Sheriffs" it could be the one running out ammunition the first and more lately that the Country is in the deep sh... because it can only watch passively its currency strengthen without being able to do anything about it. When the USD weakened in 2009 pressured by the FED QE, the JPY strengthened, when the EUR weakened with concerns about its peripheral PIIGS in 2010, the JPY strengthened too...

Wait! Wait!!! As I write the USDJPY is suddenly dropping below the 83.00-mark!!! Actually I don't care as I've been out for a while of my long USDJPY, justified initially by speculation of an intervention then by the (wrong) bet that more guys would speculate Ozawa will win. What I DO care about is the EURUSD as I got long yesterday at around 1.28. Now, it's jumping to 1.30 (!!!) and on the way up I've had the time to pyramid and add more on my long, a bit above 1.29. "Trade first and investigate later", for the moment I've no idea what triggered the move, but I suspect there’s been a lot of stop gunning all the way up. The other good news for me is Gold at 1270 as I still hold my position initiated below 700, it's a +80% performance in the Precioussss metal so far... I'm leaving you here as I have to fight the temptation to take my profits now... I'll go and take some fresh air…


EURUSD 2-day intraday Sept 13-14, the green circles are my purchases

TLofT be with You!
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FYI As this post is published: SPX 1126 // SX5E 2806 // NKY 9299 // DAX : 6275 // EURUSD 1.3007 // USDJPY 83.07 // XAUUSD : 1273

Like a Virgin...

.. who receives a margin call for the very first time... like a vi-iii-iiiirgin

This weekend, I checked the email box I provided to my spread betting broker, GFT, and I'm very proud to announce that after all these years of trading, I finally received my very first margin call, actually a margin e-mail to be precise, regarding a long position I had last week on the USDJPY and that has been stopped since. One will notice that I give to my brokers an e-mail address I only check from time to time but I don't want to be spammed by margin calls :)

In case you'd worry : I'm not broke (yet), the thing is I have in my spread betting account the minimum amount for the few current trades and my automatic stops are generally very close to my margin level for two main reasons. Firstly, while thanks to TLofT the troubles I've experienced myself so far have had a minimal impact, I've seen too many of my Fellow Traders take huge losses after their automatic stop losses were not triggered as they were supposed to, often due to the "strong volatility of the markets". The volatility is a brokers' all time favourite excuse to explain why they didn't get you out as you required them to: "Sorry you're ruined but that's not our fault". I've been using GFT UK for a few months now and I've to say I'm not very happy with their trading platforms, first their software spends ten minutes or so just to start and I happen to have some troubles to input my orders though their web platform: for instance, on the USDJPY, I just can't input the dot in the figures of my orders: with an order for the currency pair at 8500 (eight thousand five hundreds) I'm pretty sure my order will not be executed so soon... To summarize, I wouldn't let a big part of my own money with this kind of guys and I suspect that's the very same story with any broker you could think about. Having a limited amount of money in your trading account insures that thanks to margin calls, your broker will get you out whatever happens (when their money is at stake, it’s different). In the worst case you may have a slippage cost should there be REALLY "a strong volatility in the markets", for instance a flash crash, you may take a serious hit but it wouldn't kill you: survive to trade another day. Secondly, I only have a limited amount of cash in my trading account because I'm dead scared of my most powerful enemy: myself. TLofT knows how tempting it can be when you have a real conviction on your position to pull down a stop loss, increasing your capital at risk as the spot goes against you and finishing with a massive loss. "It's just noise, the market will reverse", when you are at the very maximum threshold of the stake you can risk you avoid this type of reasoning, you have no choice but to stick to the stop loss you initially decided.

As a quick reminder, the spread betting works in a very similar way as the future contracts, but for a smaller size (minimum stake of generally £1 where the minimum for a contract future is £10 with a minimum trade side of 10 contracts = £100 per point at the minimum). On a given market (Forex pair, commo price, stock, govies, index value or whatever actually), you'll put a stake, long or short, per point of variation of the spot price of the market. For instance, if you go long £1 EURUSD at 1.2800, and you (manage to) take your profit at 1.2840, your profit is of 40 pips x £1 = £40... Sounds easy no? The problem is a few people understand how strong is the leverage in spread betting, the thing is with £1 stake, you control (have the same sensitivity as) a portfolio of £12,840 of EURUSD in our example. A stake of £100 per point will be equivalent of a position of more than a million quids... The minimum deposit requirement is generally around 0.5% meaning in total a leverage of 200x... The beauty of the spread betting is the profits are TAX FREE in the UK, as I often say: God save the Queen and the spread betting! This said, it just shows that Her Majesty's Revenue understood that most of the spread betting traders ultimately lose at the game so they can't claim back credits... A good site about spread betting, including reviews of a lot of spread betting brokers can be found here.

Regarding margin requirements and leverage, it looks like the Basel III capital requirements, according to Bloomberg, requiring banks to have common equity equal to at least 7 percent of assets, weighted according to their risk, including a 2.5 percent buffer to withstand future stress and deadlines to meet them "Banks will have less than five years to comply with the minimum ratios -- 4.5 percent common equity and 6 percent Tier 1 --" announced this weekend were much less tough than expected and watered down since the first draft of proposals circulating at the start of last week. It looks like they made the markets led by European banks for which the Basel III requirement timeline seems particularly favourable, fly today. Moorad Choudhry raises this morning in his daily comment in the Long Room of FT Alphaville a very interesting point : "Notice how the mimimum Tier 1 required under Basel III is below the 11% Tier 1 held by Lehman Brothers at the time of its demise." As I write now, the SPX is trading around 1122, above the 200-SMA at 1115, as I wrote in my previous post I think battles around this level are to be expected this week but to be frank I expected more resistance than what we've seen so far at that level. The EURUSD jumped this morning in Europe from below 1.27 to above 1.28. A move of more than 1 daily ATR in a few hours, it's a buying signal for me and I got in the pair at around 1.28 as I managed to refund my trading account in time...

EURUSD intraday chart, Sept 13th

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FYI As this post is published: SPX 1122 // SX5E 2814 // NKY 9321 // DAX : 6282 // EURUSD 1.2866 // USDJPY 83.79 // XAUUSD : 1246

The Financial Tea Times

Very short one today as from time to time, even a guy like me happens to be swamped... That's precisely the main reason why I work day and night on my trading 24-7 (well let's say 12-5 only): to ultimately have the TIME to do nothing... Not sure I’ll be very off at that game at the end of the day as the odds aren't really in my favour...

As I write, Obama is speaking and the S&P 500 is coming back to its opening level at around 1105 after a trip to see how the air feels like at the 1110-level. We'll monitor closely whether it manages to close for the week about the 1100-level or not but it looks like the battles are heading for next week to the 1115-mark which is the important 200-SMA (Simple Moving Average) resistance for a third test. At that level, I have as well a 50% Fibonacci retracement. Anyway let's keep the action for the next week and it's time for me to slip into the weekend...

Oops, one last thing, if you “day trade, take a short view when investing, trade in a range of asset classes on a short term basis” and if you're around London on September 29th, you're invited for a Tea, not by me but by the FT, at 3.30pm at their office. They "would like to discuss how you currently get information, data and tips both on-line and in print format to help in your trading. Where do you get this and how can the FT help? Do you need different kinds of information or tools? What services do you need on your mobile or Blackberry?" A guy there has to be contacted before Monday for an official invitation, I won't be able to attend myself as I'll be on a plane that day back from some vacations, this said, I find a bit strange to invite day traders during the trading day because during the trading day, the day traders trade....

OK, OK, I leave you here my Fellow Trader, have a great weekend and TLofT be with You, even when the markets are closed!

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FYI As this post is published: SPX 1106 // SX5E 2780 // NKY 9239 // DAX : 6214 // EURUSD 1.2725 // USDJPY 84.15 // XAUUSD : 1245

Time to come back to the Far East ?

Long time I've not posted about mutual funds. That's not because according to ETF digest the US mutual funds have seen 18 straight weeks of equity redemptions, but because I got myself out of my equity funds position at the very beginning of July, fearing a consequent slump on the stock market (that has not come so far...). Most of my equity fund position , now turned into UK Gilts, was then composed with the Asian Pacific fund SJP Far East (Bloomberg : SJPFARA LN) managed by the brilliant (well I find) Hugh Young at Aberdeen. You may know what my rules regarding portfolio selection are: less diversification as possible, seek for a senior manager with a long and great alpha track record, the most inefficient market as possible and just go for it! When you feel there's a risk the markets crash, switch it all to Gilts, when the risk looks more limited, go back in. It seems like this summer the whole world had the same idea as me if you look at the Equity funds redemptions and the Gilts yields...

Have a look at the chart above of the prices of the Far East fund from the end of June, a bit before I got rid of it, to today. The fund has outperformed big time most of the stock indices (maybe all of them) and I have let on the table a part of the increase (around 4%) but I locked in July around +10% Year-to-Date which remains decent for an equity fund so far this year. The good performance of the fund is not only due to the alpha of the manager I charted below, but mainly thanks to the JPY appreciation (roughly 20% of the holdings of the fund are in Japan) as investing in an Asian fund in GBP, you bet on the appreciation of both the local equity markets there and the local currencies vs the GBP. This said, I've to confess that the appreciation of the JPY was not really what I expected and I was more eyeing the one of the Yuan (that was the best way I found to go long the Chinese currency)...

Performance of the Far East Fund vs its Benchmark FTSE Asia Pacific in GBP

Naturally and I'm sure you've guessed it the question today is should I get back on the Far East fund? Well, like for my trading, I will use a technical indicator as a guidance in my longer term investment decision: the 200-SMA (200-day Simple Moving Average), remember “the bulls live above the 200-SMA and the bears below”, it's that simple. I will use the 200-SMA, not on the Far East that trades already well above its average but on the S&P 500 as I believe Wall Street is still the guide for all the equity markets. Consequently, let's wait for a (n-th…) confirmed break of the SPX 200-SMA, the risk is to sit and watch the Far East skyrocket without me on the rocket, but as you know, my Fellow Trader, that's the game...

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FYI As this post is published: SPX 1099 // SX5E 2790 // NKY 9098 // DAX : 6227 // EURUSD 1.2759 // USDJPY 83.70 // XAUUSD : 1253

Welcome back to the Real World, Neo

I want stop guns, lots of stop guns

It looks like the concerns over the PIIGS are back and yesterday the 10-Year yield spread between Germany and Portugal hit a record high (380 bps). The "official" story of the market as published by the Market Polit Buro (MPB) lately is that an article from the WSJ triggered a drop in Asia yesterday that was followed by a drop on the European bourses then by Wall Street that finished yesterday more than 1% down (on low volumes) and then followed by the Asian session today and then...

Once again I don't totally buy the story of the explosive article as there was nothing really new there. If you follow this blog and our discussions on the Hand of Scalpuman Forums (hi Mum!), you know that when the results of the European banks stress tests were announced, I argued that it couldn't fly as the government-debt default risk was not properly taken into account. I didn't mean to say "See? I was right!”, what I meant is IF even I know, the whole market knows... What is surprising (and not realistic in that story) is the lag in the market reaction. The market is just the fastest discounter I know. At least one thing is confirmed: the summer is over, the holidays are over. Welcome back to the real world, Neo!

The gossips this morning concerned mainly the FX markets: the rumour of the SNB shorting the EURUSD and unwinding some of its massive EUR position, that might have put additional pressure on the pair that struggled to hold the 1.2700, leaving supposed (by Informa) "short term stops around 1.2735 untouched for now as the pair works through the 1.2675/70 bidding zone." Also, inevitably and like everyday for the last couple of weeks, there were some rumours of JPY intervention, as seen on the Market Live of FTAlphaville this morning quoting another source:

"USD-JPY spiked up to 83.94 highs amid good buying interest by a reserve manager, which triggered talk of BoJ rate checking.
- There is also UNCONFIRMED chatter that some Japanese banks have been told to manage dealings desks late today.
- USD-JPY has been supported since it traded at 15-year lows of 83.35 in Asia, with quasi-official bids, hedge fund demand and further option related buying fueling a modest short covering rally. Exporters continue to leave sizeable offers from 85.00-10, while there was increased reports of repatriation from real money names - probably from gilt coupon payments yesterday."

In addition, the comments today from S&P saying that the Bank of Japan could boost its purchases of Government Bonds to help Japan overcome its deflation problem, which would also serve to weaken the JPY and the one from Ozawa, the shadow shogun and PM candidate who also called for bond buying this morning definitely helped the USDJPY rebound from its 15-year low. On my side, after my long was stopped yesterday, I'm waiting for a strong move up to get back on the pair and such a move could come very soon. As I end this post, the market is rallying and Obama is expected to formally unveil a mix of business tax cuts and infrastructure programs to boost the economy. More battles are to be expected.
TLofT be with You.

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FYI As this post is published: SPX 1100 // SX5E 2754 // NKY 9024 // DAX : 6167 // EURUSD 1.2745 // USDJPY 84.00 // XAUUSD : 1256

Trek and the City

The BoE.. by night

In order to compensate the bank holiday yesterday in the US and the fact that our dear American friends weren't able to trade, today 10,000 Tube workers here in London are going on strike forcing the londoners to take their 2 feet, cycle, navigate, crawl or swim to work today. Strikes hit France as well is on today but this is more usual for the country (remember even the Football team went on "millionaires strike" in South Africa) and for the season, nothing to comment. It looks like the unions support the "fair trading". Actually the strike here in London hasn't affected me that much, at the opposite it was for me the opportunity to have a walk outside the Bank underground station, next to the Legendary headquarters of the Bank of England. Today the streets are very crowded, full of City grunts joining the Orc Race by foot trekking in the City. Every time I'm near the building of the "Old Lady of Threadneedle Street" as the BoE is nicknamed, I'm thinking about all the events that happened here in the past and all the decisions that plunged England (and the whole world) in the Great Depression as described in the excellent Lords of Finance by Liaquat Ahamed . As I was close to his office, I dropped a SMS to King asking him if he was available for a quick Coffee at Starbuck with his old friend Sauros but I got no answer: he's probably too busy working on tomorrow's rate announcements. No inside information today, so I just headed to my office.

The morning disappointment for me didn’t come from the strike but from the stop loss on the long USDJPY position I posted about not sooner than yesterday that was triggered. That's one more loss for Sauros: a profit from 84 to 85, a loss with a bigger stake from 85 to 84, Give back to Caesar what belongs to Caesar... with a tip for the failed attempt to pyramid. Please note that the net loss of this trade is mitigated by the fact that when pyramiding and adding on winners, one is protected to some extent by the initial profit (the base of the pyramid). With the insight of a Back Trader, I'd say that the fact that the USDJPY lost more than 1 ATR (Average True Range) in the hour following its peak at 85.23 was a bad omen for the position as you know that for me, a move of 1-ATR in a short period of time in a very strong signal in the direction of the move.

Now, depending on the future action of the markets, I may want to take back from Caesar what belongs to Sauros and put on a long USDJPY back, but I will wait it reaches back 85, where I let it. That's called a "whipsaw stop" (that comes I think from the legendary Turtle traders group): the idea is instead of having a 2-ATR stop, have a 0.5 ATR one and take back the position where it was initiated. That implies more frequent losses but in the long run, it is supposed to let you better off. Alternatively, I may get back in the currency pair should it move up of 1 ATR in a short period time, say a few hours to 1 day, but for now the Technicals once again signal a move down.

Why the sentiment suddenly turned bearish? An article from the WSJ today allegedly triggered the drop in Asia: Europe's Bank Stress Tests Minimized Debt Risk. Well, it may have helped but I think there’s nothing really new there and I don't totally buy the story. It looks like once again it’s Journalist's duty to find a cause for every move. The only thing I know for sure is there were more traders desperate to sell than desperate to buy...

TLofT be with You.
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USDJPY : Pyramid under Construction!

Following up on Friday's post and on my bet on the break of the correlation between EURUSD and stock markets that would come after surprising good US figures, I've to say that things haven't exactly gone as planned... The US August Non-Farm Payrolls (NFP) as expected showed a positive surprise and "only" fell 54K versus a forecasted decrease of 105K and the move up of the EURUSD was to some extent muted, notably compared to the jump of the USDJPY that reached 85.23, everything had been going almost as planned so far. After a totally natural jump up of the EURUSD at the news, I was expecting a strong drop, waiting with a short order set below 1.28. But despite the Non-Manufacturing ISM index that came up with a negative surprise (51.5 vs 53.2) and sent momentarily the S&P 500 below 1100, the stock markets rallied, the American index closing above that level and the EURUSD climbed as well above 1.29: no de-correlation, the safe haven role of the USD still rules, Sauros was (once again) wrong... I finally cancelled the order before the weekend, P&L of the strategy: zero.

Another trade that is likely to be much less neutral is the one on the USDJPY. As a reminder, I locked last month a profit on a long position carried from roughly 84 to 85 and I put back on a long, bigger than the previous one, on Friday as the pair was flying after the NFP at the price I let it, around 85. This morning, my stop loss was about to be triggered as the pair visited the neighbourhood of the 84-mark after weekend comments from Japanese Fin Min Noda admitting that it would be "difficult" to gain support for international coordination to halt the JPY appreciation. As I write the USDJPY is back to around 84.30, at the levels we've seen during the last week. Well, I'd say that I've had better entries...

To explain why I got back on the long USDJPY train, I could argue on a macro side that if Ozawa, aka "The Destroyer" aka "the Shadow Shogun" wins the Democratic Party of Japan (DJP) elections on September 14th, he could make "actively" huge investments "abroad [that] would be effective in controlling the rapid yen rise." and it looks like this chap doesn't give a damn about what the US or Europe could think about a Japan intervening alone to weaken the JPY. Of course, I've no view on these elections (that's the topic of an article in the Economist this week: Self-Destruction , that argues that "For the good of Japanese democracy, not to mention its own future, the DPJ must reject Mr Ozawa and all that he stands for") and I could argue that my play here is more a speculation that others guys after me will speculate that Ozawa may win and that could weaken the Yen...

I could argue all this but actually my position has been mainly driven by an experiment on my trading system: I'm experimenting here a pyramid system, still under development but I suspect it could lead to massive gains. A few more explanations at that stage: a couple of weeks ago, as the USDJPY reached a 15-month low (I didn't it was a low at that time...) I decided to initiate a long position for a good ride, say 400-500 pips, the USDJPY at 88-89, with the intention to pyramid all the way up, averaging up my purchases. I first entered at 84 and the currency pair went in my direction and I was able to take a profit of 1-ATR at 85, then I'd been waiting to get back on the position. After I got out of my position, if the pair kept on increasing, I'd take it back with a bigger size above where I let it at 85 (say at half an ATR above) : I'd have started to build my pyramid, I'd have missed 0.5-ATR of the move but I'd still be on the trend. Now if after I got out at 85, the pair decreased: good, I've sold at a top and I'd wait for it to come back (if it comes back) where I let it to put on the position back, with a bigger size (that's what precisely happened): that’s a kind of “whipsaw re-entry”. Be careful, Pyramid system under development, Pyramid under construction, guys!

Some TA (once again stands for Technical Analysis and not Tits and Ass) to end this post: I read this morning on the analysis from IFRMarkets, that the Kijun Sen line at 85.24 stopped the advance of the USDJPY on Friday. Don't worry, I don't understand neither what I just wrote and the chart above, I put it here because it's pretty colourful and I find it pretty cool... If like me this morning, you're wondering WTH the Kijun Sen line is, it's related to the Ichimoku chart system and it's the (HIGHEST HIGH + LOWEST LOW)/2 for the past 26 periods and that link could be of interest for you. Pretty Interesting I've to confess, at first sight, I guess that charting system should work not badly and it’s worth to have a closer look.

TLofT be with You.
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EURUSD : "Faites Vos Jeux", Place your Bets!

This week is THE WEEK and today is THE DAY with the Non Farm Payrolls (NFP), market consensus at -105K, and the Non Manufacturing ISM index both later today. This morning (in Europe), I feel a bit like at a casino, putting my chips on a roulette table: "Faites vos jeux", place your bets, come and place your bets on the EURUSD at the giant Forex Casino! It seems that the whole market awaits and the EURUSD has been stood still in a range between 1.2800 and 1.2830 since the ECB yesterday, it's now trading at around 1.2840.

I have to confess one thing to you, Fellow Trader: to be totally frank and straight to the point, I have no idea of where the market goes and no specific view on the EURUSD today. Hold on! Don't click on "Back" on your browser and try to find a serious trading site that will give you a good forecast yet, I can argue on this: first, and once again, I'm not an economist nor an analyst and my job is not to forecast, my job as a trader is to make money from the markets. Whether I'm right or wrong on my opinions doesn't matter provided I'm right in my positions. Secondly, I'm not the only one who doesn't understand the current action of the EURUSD: a couple of weeks ago I had drinks with a "FX weatherman", a research guy who gives his bank's FX forecasts on Bloomberg TV, CNBC,... And this chap confessed that the EURUSD was pretty unpredictable. Let me write it again: the professional forecasters CAN'T forecast the EURUSD His argument is that there's a lot of noise on the star of the currencies pair and analysis on minor currencies was easier and more definitely more “clean” : AUD, NZD, SEK etc. Well that's his words, not mine and once again, it was in the middle August, this could have changed.

OK I've no view but as you may have guessed I'm in a mood for gambling and I will place a bet before the dealer says no more bets or "Rien ne va plus". As the USD is a safe haven, the EURUSD is pretty correlated to the stock markets (currently its correlation with the SPX is close to 80%), but as posted in a previous post of mine, I've noticed two cases during the past few months when, after the release of important US figures, that correlation broke and triggered a very strong move on the EURUSD, the kind of thousands-of-pips trips. The first move I refer to occurred in December 2009 with a positive NFP that sent the currency pair from the gates of the 1.50-mark to 1.40 then 1.20 (the PIIGS crisis helped a bit for the second part...) and the second move in July 2010 and bad ISM figures sent it from 1.22 to 1.32. Further to this, I will play the de-correlation between the EURUSD and the stock market and my bet is as follows: I bet the NFP and the ISM will be strong positive surprises, despite the rally this week, I think too much negative news have been discounted since the end of August and the plethora of bad news on the USD economy and this will strengthen the USD, sending the EURUSD in a strong move down while it is expected to grow in such a case (and may do so at least just after the news). The way I will trade this is though an order (so for now it's a free bet): a bit before the release of the figures, I will place a short order between 0.5 and 1-ATR below the spot, that will be executed if a strong move down is initiated.

So my Fellow Trader, place your bets, the ball is going to be thrown very soon... TLofT be with You and Good Luck!

EURUSD (source: IFRMarkets)
1.3000 Psychological Level
1.2923 Daily High Aug 18
1.2910 30-Day M/A Line
1.2856 Sept 01 High
1.2846 10:40 GMT FRI 03 SEP
1.2800 Psychological Level
1.2776 Daily Low Sept 02
1.2744 Daily High Aug 31
1.2722 10-Day M/A Line

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The Lord of Gossips

Sometimes I feel like traders (and women, needless to mention female traders) spend their whole life seeking for the latest gossips: market rumours, tips and some insights about the colour of Lady Gaga's next pair of shoes... Those just drive (and have always driven) the financial markets, that's probably our human nature or maybe the nature of speculation itself that leads us to run an endless race to get the information and trade on it before the bad guys (the competitors). I've always dreamed to work in a position where you are an insider, I mean a real insider, a position where you GOT some valuable information, at the FED or at Moody's for instance, even as an intern I wouldn't care. Of course, that's not to profit myself from the inside information, The Lord of Trading forbids (and the FSA, SEC and all the regulators too...), but merely because I'm convinced that your life is better and you're happier in such a position: you make plenty of friends, who kindly offer you some gifts: sport cars, watches,... On the weekends, you are invited to the best spots in the world, whatever your favourite sport is, you've a seat for all the best games and I suspect that also increases dramatically your sex appeal... "The new girlfriend I've met after I began my internship at the FED looks like Megan Fox but that's weird, she spends her time asking me questions about Quantitative Easing"

To me, the best way to deal with rumours (if you're an insider, I don't think it's worth even to even think about using the information, I'm not kidding, going broke is one thing, going to jail is another...) is to consider them a bit like arbitrages should be considered : your Financial Markets professor was wrong (you knew it !!!), there ARE opportunities of arbitrage but it's wise to consider that you won't get them as there are armies of guys whose jobs is precisely to find them before you and to benefit from them and they are faster than you could imagine to be in your wildest dreams. If you hear about a rumour, it's probably too late for you to benefit from it. This being said, unlike for arbitrages, I think it's possible to profit from rumours (the thing is not to be the last guy trading it), but if you try, keep in mind the window is very very tight.

There are also some chaps who spread false rumours, like allegedly Rothschild regarding the outcome of the Battle of Waterloo according to the Legend and it has now become much easier now with the widely followed online forums (including the Hand of Scalpuman, which is the Voice of the markets ;))) ) such as ADVFN bulletin board in the UK that sees thousands of new posts every day (and MorningStar is said to have more than 6 millions registered members). Yesterday the FT reported investigations into rumours spread in online investment chatrooms and such rumours may have "triggered “flash crashes” in the share prices of small-cap companies this year". Well, could be tempting to launch a rumour "Sauros and Cheryl Cole, it's over" but once again this could lead you directly to jail. This case has to be followed closely as it could impact profoundly the online trading forums and blogs...

OK, OK, enough blah blah, now let's go to the heart of the gossips: as posted before, lately we had a lot of rumours on a potential intervention of the Japanese Sheriffs to weaken the JPY. The more rumours there are, the less impact they have on the currency. The one dated yesterday suggested that "some senior members of staff experienced in conducting intervention have been brought in" (source : IGM), soon the Japanese MOF won't be able to go to the loo without triggering some moves on the USDJPY, that's Power. Of course, I’ve kept the best for the end, and this one only motivated the topic of today's post: on Tuesday, as spotted by Batman, the Dark Trader of Analyze Capital, there were rumours the Chinese central bank governor Zhou Xiaochuan had deflected and had fled after the bank posted huge bond losses. Huge losses meaning HUGE bond losses: $ 430 billion dollars, yes $ 430,000,000,000 !!!! Don’t mess with the Chinese. The IFR, reporting the news wrote that traders didn't know whether to laugh or to cry at it, personally it made me laugh :) This said don't forget the golden rule: never trust a rumour before it is officially denied.

My final thought for the day is further to my comments in the first paragraph, even if I would be a super insider there, I wouldn't really dream of working for the Chinese Central Bank...

TLofT be with You
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Martingales vs Anti-Martingales

One has to learn from his/her own mistakes, but in trading, learn from others' mistakes is much cheaper! Last Friday, a fellow day-trader of mine took a big hit trading the EURUSD, more than 20% of his equity gone in a couple of hours. The post-mortem of the deal reveals at least 3 mistakes. Firstly as he was overconfident that day further to a long winning streak, his stake was the double or the triple of what the money management system he has spent years to develop indicated. Follow your system religiously! Secondly, during the action (Friday was US GDP and Jackson Hole's speech) he made a (silly) computation mistake in the last order he input, that order if correct would have resulted to a profit. While my trading is not as frantic and requires less reflexes as day trading, I always have handy a simple Excel spreadsheet with all the computations of orders, stop-losses, stake, risk... set up. The last mistake, but not the least : he went out the night before and got drunk which definitely didn't help. I know it may sound weird, but my experience shows the correlation between your trading results and your fitness and state of mind at the moment of the trade is pretty high. Maybe the old advice not to trade on Fridays is not only based on a particularly strong volatility that day of the week, but also because the day before on Thursdays, we go to the pub :)))

More seriously, we've been discussing for a while with this chap an endless debate regarding trading systems: Martingale vs Anti-martingale. If we consider the toss of a coin, Heads or Tails, the classical Martingale system consists in doubling the stake after every loss until a win finally recovers all the losses and gives a profit equals to the original stake. The anti-martingale at the opposite consists in increasing the stake after a win and decreasing it after a loss. You may have guessed, my friend's system is a Martingale (while I've to confess one of the most efficient I've seen, provided you don’t do mistakes and follow it…) while I'm a fervent defender of Anti-martingales. This said, like the gamblers in the 18th century in France, we spend our time experimenting new variants of martingales (and anti-martingales) systems. The main arguments I have against the martingale systems is you may need to put at stake a lot of money in order to earn a small amount : 2, 4, 8, 16, 32, 64, 128,... to win 1 and mostly that you bear a strong risk of ruin (or losing consequent amounts). Our intuition tends to underestimate the probability of ruin, and believe that a long streak of Heads (say 6-7) is very unlikely, but here's the magic formula (I think I found it on Wikipedia but I can't find it again there, the article may have changed) to compute the probability to have a sequence of n "Heads" during a sequence of N spins :

1-(1-p^n) x (1-q.p^n)^(N-n)

Where p is the probability to get "Heads" and q=1-p. Assuming a Head and Tails game with a 50% odd for each, the formula tells us the probability to get 6 Heads in a row during 150 spins is of more than 68% (56% for a 7-streak). Higher than what you thought, right?

Applied to the world of trading, putting more on losing deals and "averaging down" is a commonly used martingale strategy (I call it "when you're in trouble, double"), while “pyramiding” and put on winning deals is an anti-martingale. The trader using the former will have a high proportion of winning deals and makes quite often (small) profits, but the odds are that ultimately he or she will suffer a consequent loss that will wipe him or her out. The trader using the latter may see numerous and frequent small losses before a big winner will drive him/her ultimately to profits. That's where the anti-martingale meets the old good "cut your losses short and let your profits run" principle. This said, the two main enemies of a trader using an anti-martingale is on the one hand the faith he/she has in his/her own trading skills that can be strongly stress tested by frequent losses and on the other hand the "breakeven effect" as after a long losing streak, it's very tempting to take the profits at breakeven closing precisely the deal that's supposed to lead to consequent profits... Sometimes, we tend to forget that the goal of trading is to make money and not to recover from the previous losses...

I’ve to let you here, Fellow Trader, the US August ISM Manufacturing just surprisingly rose from 55.5 to 56.3 (vs an expected decrease to 55.3). That could trigger some action in the markets and I’ve to recover from some of my previous losses…

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FYI As this post is published: SPX 1077 // SX5E 2701 // NKY 8927 // DAX : 6066 // EURUSD 1.2826 // USDJPY 84.50 // XAUUSD : 1245