The Eye of Sauros @ The Lord of Trading

USDJPY : Pyramid under Construction!

2010-09-06T16:14:00.007+01:00

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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FYI As this post is published: SPX 1104 (C) // SX5E 2754 // NKY 9301 // DAX : 6155 // EURUSD 1.2880 // USDJPY 84.22 // XAUUSD : 1250

EURUSD : "Faites Vos Jeux", Place your Bets!

2010-09-03T11:57:00.015+01:00

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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FYI As this post is published: SPX 1090 // SX5E 2731 // NKY 9114 // DAX : 6108 // EURUSD 1.2842 // USDJPY 84.47 // XAUUSD : 1252

Did Friday's Rally really happen???

2010-08-31T14:19:00.006+01:00

The summer holidays are now over, so the long weekend for me and other guys in the UK... Now, back to my screens, I'm wondering if Friday's rally did really happen and was not a dream . It’s said to be triggered by the "better than expected" US GDP and "less pessimistic" Helicopter Ben's comments but I didn't buy those two reasons, just journalists job to find some reasons to any moves. Afterwards I'd say it looks like it was a Friday's short squeeze, probably strengthened by the UK bank holiday yesterday: the Bears cut their shorts for the long weekend. Both Bulls and Bears have had some bad experiences keeping their positions over the weekends.

This week is what I call (in my very own jargon) "THE Week", with the ISM (Manufacturing tomorrow the 1st, non manufacturing on Friday) and the Non-Farm Payrolls (NFP) on Friday the 3rd. THE Week happens once a month. In the meantime, we'll have notably the Case-Shiller, the ABC Consumer Confidence later today, the ECB on Thursday to entertain us, in the case we find the time waiting for the NFP too boring. The mix of UK data this morning, including mortgage approvals rising to 48.7k from 48.6k last (vs 46.5K expected) and the Net Lending to individuals on dwellings dropping to just GBP 0.1bn (vs GBP 0.7bn est), just had no impact on the markets and the Gilts have been muted. According to Informa (IGM, I find them pretty good on the EURUSD) : "08:39 GMT - Swiss names are being blamed for EURUSD's climb in the European morning so far. The Euro's half a cent or so gains from Europe's open will have taken many by surprise given the very negative stocks showings of recent sessions, perceived heightened risk aversion and wires reporting the ten-year German bond yield hit a record low of 2.085%. A new day's best of 1.2687 has just been recorded, with offers said to come back into 1.2700/20. Nearest expiries in place at 1.2640/50, with contacts also noting that month-end related flows have been largely supportive so far."

Thanks to TLofT, I got out on Friday of my long USDJPY I carried from (near) 84 to (near) 85, I've just checked and fortunately I’m sure I've not dreamed this part... As I write the FX pair trades around 84.30 and the action the last 3 days is shown in the chart. My taking profit that was a kind of "buy the rumour and sell [before] the fact" trade, the rumour referring to a potential FX intervention of the Japanese government, is not such a bad deal as initially thought, even if I spent the whole evening on Friday watching the pair climb without me. Now I may consider to put on the long position back and with a bigger size IF (and only if) the pair climbs back soon where I let it, that's my way of pyramiding. For the time being, the move down from the doors of the 86-level is too strong for my considering to fade it: the technicals indicate more downside...
TLofT be with You.

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FYI As this post is published: SPX 1049 // SX5E 2593 // NKY 8824 // DAX : 5872 // EURUSD 1.2725 // USDJPY 84.32 // XAUUSD : 1246

Martingales vs Anti-Martingales

2010-09-01T15:45:00.007+01:00

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

The Lord of Gossips

2010-09-02T15:30:00.006+01:00

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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Too obvious actually...

2010-08-13T15:41:00.007+01:00

Wow, some big moves on the EURUSD lately! To say I predicted their direction would be a lie, to say that I don't totally understand what happens would be an understatement : I just don't know. Looking at the momentum of the move down, I guess I'm not the only one : can you smell the triggered stop loss gun powder ???

My long position was stopped at around 1.31 a couple of hours before the FED announcement on Tuesday (the orange circle on the chart). When it announced its "QE-light" measures and as the pair was jumping, I was upset and thought I'd been stop gunned by some bastards who took my position to carry it to profit. That's the worst thing : be right and lose money... But since the very next day, I've been thanking every day the Lord of Trading for the trigger of my stop loss... As I write, the currency pair is fighting around 1.28, some 300 pips below my stop... I've to re-assess calmly the situation but it'sl probably the end of the long EURUSD-short SPX position I've been playing for a month and it would ultimately end with a small loss : the strategy was not bad (I'm still proud of me!) but globally I've had a bad timing on the trading and... it's just all about that...

Now how to explain the move up of the USD and its strength despite the QE-light and prospects of QE? Well, as told before, I'm not sure. The only reason I could see is not fundamental but purely technical, it's just what happens when everybody is on the same side of the boat : last week, it looked obvious that the EURUSD would grow, it looked obvious that if the FED gave any hint of QE, it would jump. Too obvious actually...

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Today is the Pay Day

2010-08-06T17:58:00.006+01:00

It looks like today is the pay day for the long EURUSD - short SPX strategy I've been carrying for a month or so as further to bad Non-Farm Payrolls figures (-131K vs -65K estimated while the unemployment rate stays at 9.5% vs 9.6% est) and as I write the EURUSD jumped from below 1.32 to above 1.33 and the S&P 500 dropped from above 1120 to below 1110. Bad US economic data, that's essentially what the strategy has been about...On the one hand, those bad figures push the US stock indices down, I'd say a bit obviously. On the other hand, they tend to break the positive correlation between the EURUSD and the US stocks pushing the currency pair up as the market anticipate further QE from the FED while the ECB rhetoric could be more about tightening and exit.

Well the pay day may be today but let the profit run, so let's postpone the "settlement day" to later, hopefully next week.

Have a good weekend my Fellow Traders!
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The Fear and Greed Indicator : a new Weapon in my Arsenal ?

2010-08-19T11:19:00.006+01:00

As it's probably not the most exciting week of the year in terms of trading, it may be the time to write a post about some TA (stands for Technical Analysis and not Tits and Ass as suggested Batman in our weekly discussions, anyway it's always time for the latter isn't it?). If you're crazy enough or have some too much time to waste to follow my blog (and if you do, thanks again!), you know how the ATR or Average True Range is important in my trading. The True Range is merely the difference between the high and the low, corrected with the opening gaps (if any, for instance for FX pairs, it's just high-low) and the ATR is the moving average of the True Range on the given period.

True Range = max(high, previous close)-min (low, previous close)

Basically I use the ATR to calibrate my stop losses, for instance I generally consider any move below 2 ATRs as noise and what I don't want is to be stopped by the noise. It's the worst thing : be right but stopped and lose money before this bloody price goes in your direction. More importantly, I like to trade so called "Volatility breaks", meaning I like to wait for a move of x ATRs in a direction before I put on a position in that very same direction. My intuition is market prices follow some laws of Physics (quite ironically because when I was a student I really hated Physics...) and their moves have some inertia particularly when they have some strength. It takes time to reverse a strong move. I look for such a strength in candlesticks analysis and technical indicators (RSI notably) but I've been looking for some measures of the inertia. A fellow trader of mine, further to our discussions about these concepts sent me a memo about an indicator developped by Bloomberg, "the Fear and Greed indicator" (nice name), that seems to fit the bill (the paper is enclosed below). The FG indicator works in a similar way as the MACD, it's the spread between 2 ATRs (a fast one and a slower one) calculated in a way that it oscillates on a zero base line. As a kind of prime derivative of the MACD, the FG could be considered to some extent as a measure of acceleration of the price. It could be the measure I've looking for and could be new weapon in my arsenal. I let you here, I've to investigate further and do some test, at least it will kill the current boredom...

Here's the "user's guide" of Bloomberg's FG indicator :
To understand the Fear and Greed indicator, we must first understand the concept of True Range and Average True Range. True Range looks at the relationship between the current bars high and low, and compares it to yesterdays close to identify the largest range. For example, if the current high is $12 and the low is $10 dollars, the range would be is $2. If yesterdays close is $9 then today’s true range is $3.

True Range is important because after the market closes and prior to the open there is a significant amount of macro and micro events that can shift the level of supply and demand for a security. These events determine where the price of the security will open that morning. True range is therefore adjusting for gaps between the close of the prior day and the current days open to determine what the “True Range” is. Average True Range is a simple or exponential moving average of the True Range values historically. The ATR study on can be found in your G and Launchpad charts and represent this concept.

The Fear and Greed indicator is the spread of two weighted moving averages of the True Range. It is calculated in a way that it oscillates on a zero base line. The indicator provides signals in three ways.

1. A buy signal is generated when Fear (red) turns to Greed (green) and a sell signal is generated when Greed (green) turns to Fear (red)
2. Divergence - when price trends lower and fear reaches higher lows or when price trends higher and greed is at a lower high. These are signs of an exhausted trend.
3. When fear or greed spikes to extreme levels it is signaling the start of a top or bottom

The small “A” on the indicator is an alert level. In the settings of the indicator you have the ability to be alerted when the fear or greed exceeds a certain value. In the above, each A appears when it turns above or below the zero line.
The legend for the indicator displays “FG(5.00)” which represents the sensitivity factor. Depending on ones investment style, increasing or decreasing the value of this will speed up or slow down the rate of change of the Fear and Greed value. - Paul Ciana, CMT

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One Post a Day keeps the Sovereign Bond Yields low...

2010-08-27T15:40:00.005+01:00

One post a day keeps the doctor away...it's my fifth post in a row this week. Blogging has put me up to speed after a pretty inactive summer period in trading (and I’ve to confess, a losing streak) and while the benefits of blogging on my trading account are not really evident, I enjoy!

One of the major facts this week on the markets that I've not discussed yet is definitely the govies bonds yields hitting record lows (meaning bond prices increase as they are inversely proportional to yields). In particular in the long term part of the curve, the 10-Y bond yields in the US, UK and Germany are now all below 3%. The causes of such a strong bid are likely to be sought among a list well covered by the press and the analysts : fear of double dip, safe haven bid, prospects of deflation and Central Banks rates close to zero for a more "extended period" than initially expected,… In the UK, the comments from Martin Weale, the newbie at the Bank of England's monetary policy committee (MPC), that the UK faces a "real risk" of a second recession definitely helped the move down. It looks like the guy hasn't completed yet the "Master the impact of your Rhetoric" course of the BoE induction pack… On the US side, the QE-light seemed to have had an impact on the move too, not only due to the mechanical impact of the purchase by the FED but also because it looks like it has not worked as expected, the markets slumped since it was announced pushing higher the bid for the Treasuries safe haven... We'll see what happens later today at Jackson Hole (weird name)...

The main question now is whether these low yields, say sub-2%, will last for a while or not and all the participants to this debate are comparing the situation with the example of Japan, where the yields have been low for 13 years. The 10-Y Japanese yields from 1990 to now are shown in the chart below, what's interesting to notice is the yields remained pretty "high" in 1995 while the Japan had already slid in deflation, now the deflation looks already discounted... big time I'd say.

I've to confess that so far I've no particular view on the matter, I think it's being played out now with the decisions of the Sheriffs, governments and Central Banks, and their actions (or inaction) in the near future will be key in the final outcome. Once again we're in the growth vs austerity debate (or “fight the deflation vs fight the inflation” or “double dip?” debate whatever name you prefer). To take 2 extreme points of views on the yield topic, both very pessimistic but different regards to prospects of Govies yields, I'll quote on the one hand Albert Edwards, the Natural Born Bear from the previous post, who forecast (along with a SPX at 450...) "yields on 10-year Treasury bonds would fall to the 1.5%-to-2% range and that German 10-year bonds would break below 1.5% while U.K. government-bond yields would fall below 2%." and on the other hand Nassim Taleb, the "Black Swan" guy, who thinks that "every human" should short U.S. treasuries, for him it’s a no-brainer. “By staying in cash or hedging against inflation, you won’t regret it in two years". We'll see. For the time being on the topic I'd recommend the reading of this interesting article from the Economist : A Bull Market in Pessimism and to keep in mind what happened in Japan, the chapter "Japan's trap" of Krugman's "the Return of Depression Economics and the crisis of 2008" (I'm currently re-reading it myself, eat your own soup)

One last thing, I took (for the time being) my profits close to 85 as US GDP was slightly better than the revised expectations (1.6 QoQ annualized vs 1.4 expected) on my long USDJPY initiated near 84, way before I initially wanted to (target at around 88). The thing is when I initiated my position the market was pricing that there will be no intervention after the officials comments disappointed. Today the crowd seems to have turned and to wait for the intervention, particularly after Kan said they were ready to take "bold" action, so my contrarian argument, which went against my usual technical considerations, is not valid anymore. The other thing as well is I wanted to enjoy peacefully this long weekend (Monday is a bank holiday here in London), I can still get back on the position next week if the move above 85 is confirmed. The last thing is the contrarian side of the deal now seems to be on the short side of the pair, the same as the technical arguments.

We'll see... For the time being, have a great weekend my Fellow Traders, TLofT be with you.

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FYI As this post is published: SPX 1053 // SX5E 2609 // NKY 8991 // DAX : 5922 // EURUSD 1.2715 // USDJPY 84.95 // XAUUSD : 1239

And the Winner is...

2010-08-10T14:33:00.004+01:00

... the JPY, and that could let Japan in the deep sh... well let's say in not a so comfortable situation. Once again.

At the beginning of the year, the EUR was pressured on concerns on the European sovereign debt to the point that some predicted the "disintegration" of the currency (Volker) or merely saw it "doomed" (Gartman). Since June, the USD has at its turn been pressured with bad US economics data. As a result, the USDJPY dropped from 95 to 85 and without the new Japanese government being able to act against or control the appreciation of the JPY.

More than 20 years ago, at a time I had the project to become a footballer, fireman or King of France, I could remember how everybody was wondering how Japan would eat the whole world and when as it was considered as only a matter of time, how everybody was admirative of their business model (a system of cooperatives that allowed the companies not to focus on short term profits as the debt was not externalized and centralized governmental organs to guide the whole Economy "Guys, let's focus on VHS players and when we'll reign supreme there, we'll let you know what to focus on"). And then, the nightmare began and the country was sent to Deflation for 2 decades. Everything, Quantitative Easing, Banks Bailouts, various stimili, basically all the arsenal we can see now... has been tried but probably too late and too small and nothing had seemed to be able to allow them to get out. That shows, as an argument in the "austerity vs growth" debate, how, while the ways to fight inflation seem nowadays more or less efficient, the fight against Deflation is not really under control. The worst thing is maybe that after 2 decades, Japan finally managed to put the head out of the water thanks to prospects of inflation... but with the worst of the timing : something like one year before the subprime crisis started...

Now with a strong Yen that make it uncompetitive and that might push it to Deflation again, I'm curious to see what will happen to Japan. Maybe it's high time to consider a short Nikkei, we'll see...

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Natural Born Bears

2010-08-26T16:49:00.007+01:00

This morning at the Market live discussion organised daily by FT Alphaville, there were a few quotes from Albert Edwards, a SocGen strategist and definitely what I call a "Natural Born Bear". The guy just predicts that the S&P 500 will tumble to 450 (yep four hundred and fifty). A bunch of quotes :

"Investors cannot move for the weight of broker research comparing the current conjuncture in the US with Japan a decade ago. While bond markets at least, move to discount deflation, most sell-side analysts still say the current situation is unlike Japan a decade ago. They are right. Things now in the US are much, much worse than Japan a decade ago."

"Equity investors are in for a rude shock. The global economy is sliding back into recession and they are still not even aware that these events will trigger another leg down in valuations, the third major bear market since the equity valuation bubble burst."

"This lack of awareness reminds me of reports this week that a 35 year old Polish man hadn't noticed for five years that he had a bullet lodged in his head. Like the equity market in 2000, the Polish man had been partying too hard to notice that he had been shot. The BBC report the police as saying “He told us he remembered having a sore head, but that he wasn’t really one for going to the doctor.”

"As the equity bloodbath of the last decade enters its final, even bloodier phase, investors continued optimism also reminds me of the Black Knight in Monty Python & the Holy Grail. Despite being grievously wounded by King Arthur, the Black Knight makes light of his injuries which he dismisses as a flesh wound. The vast bulk of the investment industry fails to appreciate that we are locked in a structural bear market and about to enter Act III."

OK, enough, I think you got it. This Natural Born Bear at least is funny, definitely more than Roubini who predicted that US growth will be "well below" 1 percent in the third quarter (tomorrow) and put the odds of a double dip at 40 percent... I'd agree on the view that those guys, perpetually bear, are like a broken clock, right twice a day (out of the 86,400 seconds of a day). As they are always bearish, they become popular and have their hour of glory when there are consequent drops that inevitably occur from time to time and the market mood turns into "fear" mode... OK, they were "right" and "predicted" the global financial crisis, fair enough, they then wrote best-selling books, appear frequently on TV, I guess their sexual life improved dramatically with the crisis and I'm pretty sure Hollywood is preparing a couple of movies starring Brad Pitt as Roubini. It has become their bread and butter to predict the apocalypse for tomorrow but if you listen to them to take your trading decisions, I seriously doubt you would still be alive. How many losses on short positions and missed opportunities they led to? My point is I don't think that a "perpetual" short position makes any sense and to be frank, some days I even wonder whether a short position makes sense or not : when you're bearish, just go cash and wait to be bull to come back to the markets, at a discounted price if you were initially right. Everytime I argue this to a Fellow Trader I'm told : "but for instance guys who were short in 2008..." I know, I know...I don't tell never to be bear : believe me or not but during my young days, I myself brought to my dear employer hundreds of millions on short positions in 2008 (the slice of the cake I got for that did that I'm now trying to do it again but this time for myself... "You know Sauros, it's the crisis and the Bank has lost a lot more than that..."). In my modest experience, you don't have to be Bear all the time, Bear before the crashes will do.

TLofT be with You.

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FYI As this post is published: SPX 1053 // SX5E 2607 // NKY 8906 // DAX : 5912 // EURUSD 1.2693 // USDJPY 84.61 // XAUUSD : 1239

By the Way, a Stock Market Crash is imminent

2010-08-25T17:38:00.004+01:00

Further to yesterday's post, I've finally got my USDJPY, the temptation was just too strong. Traded at around 84 and with a stop below yesterday's (and 15-Year) low and as I believe it could go back to 88 or so in a few weeks time, I think it has not a so bad reward-risk profile : 6:1 roughly. If the pair reaches the 85-mark, I may consider putting on more as I guess a herd of Bulls is waiting there. This said, the contrarian argument I raised that the crowd doesn't expect an intervention falls in the water : it seems to me now the whole world speculates on an intervention... OK let's consider that I speculated that after me loads of others guys will speculate there will be an intervention. The various comments from Japanese officials and their interpretation become a bit messy and contradictory, now the more there will be the less impact they will have.

The action I missed yesterday in my comments was the one of Gold, not that the move was difficult to be missed (don't blog, trade!)... After briefly trading around $1,212 the Preciouuuuus bounced off its 50-day moving average rallying $25 at around $1,235 very quickly, in the space of 90 minutes or so and the 1-day ATR (Average True Range) had been around $12. If you know my trading style, you know that a move of almost 2 daily ATRs in 1 hour or so is one of the most powerful buy signal I know, Strength and Honour! As I write one day later, guys are fighting for the Preciouuuuuus at around $1,240. My opinion is there's still room to get in but I won't do it for now because first I want to focus on my USDJPY trade, second I'm still long Gold, purchased below $700 :D One reason why I think that the price of the metal can still increase in the longer term (as in months) is every time I consider to take my profits (Yes, I happen to consider it), I'm wondering in what currency I could sell my physical Gold in (coins and bars hidden in my garden, 12 steps away from the old tree): EUR ? Well... no, USD? Well... no, GBP? Well... no... etc. OK, you got it.

Today the release of the figures widens the current discrepancies between Germany and the US: the German IFO, polling corporate leaders, kept on surprising this morning with an expansion in August after a record +4.4 points in July while on the other side of the ocean, the series of bad news continues : the US July durable goods orders gained much smaller than expected (0.3% vs 3.0 expected) and the July new home sales dropped 12.4% (vs 0 expected). To me, we are currently seeing the outcome of a weak EUR particularly on the German Export (War) Machine. The benefits of a weak currency had been my point all the beginning of the year and justified my long DAX positions then. Now this said, the US still reigns supreme on the markets, when Wall Street sneezes, the rest of the world catches pneumonia, when Wall Street crashes, not sure what happens... By the way, I was about to forget : such a crash could be imminent as the Hindenburg Omen is confirmed, according to the Market Oracle. May the Lord of Trading be with you when it happens... IF it happens!

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Kill Boredom doing Boring Stuffs

2010-08-23T17:38:00.006+01:00

Nothing is more boring than Market comments, those stories of past action and settled battles that only give the losers more sorrows and the winners more auto-satisfaction. We all know how the prices have progressed during the trading day, for instance we know the SPX opened at 1075 and closed at 1064 on Friday, but we DON'T know precisely WHY it occurred, we just have assumptions on the reasons of the move and those are just interpretations of the news. I believe there's a strong trading bias here. I guess most of the people believe that Trading is just about betting on news, if they're positive the price goes up otherwise it goes down. Forecast them accurately and you'll make money. Unfortunately it's not that simple. I think this belief is fed by the crowd of journalists and market commentators writing the headlines we read all day. That's their job to explain the market action and this asap after the fact and whatever happens. Some days, it really looks like the journalists have a stock of good news and a stock of bad news handy and as the market action unfolds the former or the latter feed the arguments accordingly: "The S&P 500 dropped because [bad news 1] [bad news 2] despite [good news 1] and as [bad news 3]". All in all it lets the impression that the news drive the prices, which is not always true. To say that the game of trading is about betting on the actual figures or news compared to the anticipation of the markets participants would be a better statement, but I think it's still not totally right. When the markets are in a mood to fall, they will fall whatever (OK OK almost whatever...) the news are. The only statement I'm considering true at that stage is that when there are more guys desperate to buy than guys desperate to sell, the price goes up and vice-versa.

Actually when I think about it, there's something more boring than Market comments : it's to write market comments... And maybe that's why I decided to write one today... The thing is the markets was soooo boring last week and the prospects for action this week remains pretty weak, that it could keep me awake. Kill boredom doing boring stuffs... typically the silly things I manage to do... Seriously, the main reason is that it will allow me to catch up with the markets as I've been staying aside for a week or so. We'll see later whether or not I will post on a more regular basis some market comments, I will do if my trading (account) benefits from me writing them and if it helps in the framework of my "Operation Absolute Trader" that aims to make me improve my trading skills, knowledge, focus and determination. I can't promise anything, we'll just see. For now, here we go :

Next week, the first week of September is promising in terms of action with the guys back from their holidays, all tanned all broke, for what I call every month THE Week : US ISM Manufacturing (Wednesday 1st), Non Farm Payroll (Friday 3rd) but I think we might see some anticipations as early as this week from frontrunners, probably guys who went back earlier from their holidays due to a bad weather (or because they went broke earlier) that could give some momentum to the markets. In addition, the highlights this week are the Durable Goods report on Wednesday and Home Sales (Existing on Tuesday and New on Wednesday). The weekly jobless claims report on Thursday could be also a mover and a decline is expected this week (491K from 500) after rises over the last three consecutive weeks, a bad surprise could impact the dollar (negatively I guess, I'm not sure now...). The US and UK GDP revisions on Friday will be also interesting to follow (double dip or sloooow recovery?). I almost forgot to mention that Helicopter Ben will give a speech entitled "The Economic Outlook and the Federal Reserve’s Policy Response” at the annual Jackson Hole Symposium

This morning in Europe, the Eurozone PMI (Purchasing Managers Index) that assesses business conditions by sectors and determined on monthly surveys of European executives decreased. In the manufacturing sector in particular, PMI weakened by more than expected (55.0 vs 56.1), likely driven by a drop in business confidence in Germany while the drop in services was more limited (55.8 to 55.6). It could assert to some extent prospects of a slower growth in Europe and the release of the data sent the EURUSD briefly below 1.27 before the pair retraced back above that mark and participants fights around all the European morning. The 50-SMA currently at 1.2735 was crossed on Friday and offered this morning some resistance, and the failed test may confirm the break. Suddenly, at around 3.00 pm BST (British Summer Time), the pair fell and headed south of 1.2650, and stays around 1.2665 as I write. Tthe equity market too dropped in the meantime as the SPX fell below the 1070-level after it opened higher thanks to M&A optimism (it's now fluctuating and back at 1072 now). I don't know the reasons for this sudden move down, the Lord of Trading knows. For now, it looks like the drop of the EURUSD stopped at the 23.6% Fibonacci (I have it around 1.2350 while my figure is not very precise, I plotted it a while ago). The European stock indices, the Eurostoxx 50 (SX5E) and the German DAX ultimately closed with slightly up, close to their respective 50%-retracement that seems to act as a support, at least for now.

The USDJPY broke its approximate 85.30/50 intraday range and is trading now at around 85.20 as among the plethora of Japanese officials' comments, the latest being PM Kan has exchanged views on several issues with BOJ's Shirakawa and "forgot" to mention about intervention prospects. A last word on Australian elections, it looks like we head for another hung parliament but it looks like the proposed mining tax is dead and it sounds like that's a slightly positive news for the sector.

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FYI As this post is published: SPX 1072 // SX5E 2661 // NKY 9116 // DAX : 6010 // EURUSD 1.2669 // USDJPY 85.24 // XAUUSD : 1225

The Yen and the Germany vs England football game

2010-08-24T16:25:00.002+01:00

Nikkei has hit today a 15-month closing low while the Yen has hit a 15-year high against the dollar. The USDJPY broke 85, easily took out a bidding zone at around 84.80 and managed to reach 84.15 in the European morning as the Japanese Finance Minister Noda commented in a news conference that recent currency moves are one-sided, excessive and disorderly moves could harm the economy, and that he is closely monitoring currency moves with great interest (so do we!). Well, thanks mate, very inspiring comment! Still no comment on intervention. Then suddenly, at around 1.20pm London time, the pair dropped below the 84.00 mark as the EURUSD broke 1.26, maybe on anticipations of US figures from insiders or guys who pretend to be insiders I don't know but the thing is the existing home sales at 3.00pm actually were pretty bad (-27.2% MoM vs -13.4% expected)... The EURUSD as I write jumped back to 1.27, the USDJPY to 84 after it touched 83.6 and the Dow back from a journey down to 10K. A better than expected Richmond Fed may have helped, but I guess that's more on anticipation that FED will intervene further to the bad Economic figure or the correction of an overaction before, only TLofT knows. Back to the USDJPY, according to Informa (IGM) the bears now target a key downside objective around 83.51.

You know what ? I think I will face the train coming at full speed, try to catch the falling knife or do like in any expression used to refer to what NOT to do in trading : bet on a Japanese intervention to weaken the JPY and go long USDJPY. All the signals based on strength, momentum, speed,stop guns etc I usually use strongly tell me to go short, but I feel like playing the low probability event here and try to achieve the trading's most difficult trick : pick the reversal.

I may go long USDJPY the way I'd bet on sports (actually I don't), let me explain further. To some extent speculating on the markets meets betting on sports (horses, dogs, football whatever...) In sport betting, the quote you get for your bet should be (to be fair) the probabilty the event occurs plus the bookie's fee (the house edge), for instance if I bet TLofT football team to beat Spain in a game and I estimate the probability at 1/1,000,000, I expect to be have a quote close to 1,000,000 to 1 if I win (actually the fair price is 999,999 to 1). The thing with sport betting is because of the bookie, you're paid less than the actual probability and it means that in the long run, you'll always lose (you have a negative expectancy). The better way to bet (I guess, once again I don't bet on sports, I can't have all the vices at the same time) is to look for good value bets, meaning bets where you think that the bookie mispriced the probability. The mispricings are more likely found in what is hard to price (obviously) and particularly the unlikely events. To illustrate this, let's go back to the World cup last summer : before it started, "Spain to win" was quoted around 4 to 1 meaning that the bookies estimated the probability at 20%. Even with the insight of knowing the result, I'd say it was not a good value deal (just consider that Brazil was quoted 4 to 1 too if you find it hard to consider a winning deal a bad deal). In comparison, "Germany to beat England in penalty shoot outs" that quoted 9 to 1 (10%) before the game had a much better value (consider "Germany to beat England with a spread of 3 goals" if you find it hard to consider a losing deal a good deal). On one deal, you are more likely to win with bets of the kind of the former, but in the long run, you'll be better off with the kind of the latter.

To be back to the USDJPY, as I feel more and more players turn into Bears and fear would push higher the JPY, that we all know the Japanese government is "culturally" not used to intervene, that the several comments from officials suggest that time to intervene has not come yet (and the Lord of Trading knows that before a devaluation, the finance minister ALWAYS deny any intervention). I believe the good value deal is in a bet for an intervention, but at the same time, I lost too much money already trying to pick bottoms. So the consensus would be to put on a low risk high profit long trade, just in case I'm right. Now I'd understand if it sounds to you like I'd be gambling here. I've to confess it would be true to some extent...

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FYI As this post is published: SPX 1057 // SX5E 2611 // NKY 8995 // DAX : 5926 // EURUSD 1.2683 // USDJPY 84.04 // XAUUSD : 1234

Happy Anniversary to me!

2010-08-18T15:11:00.003+01:00

Yesterday was my kid's second birthday, it was as well the 24+9=33-month anniversary of my decision to dedicate my time to learn the art of Speculation and to strongly commit to quit asap the Orc Race I'd been running at the Front-Office of Investment Banks for more than a decade. The moment I realized I would be a dad for the first time (and I've to confess a bad bonus that year, keep in mind it was end of 2007..., helped) was a total eye-opener to me at least on two points :

- What I'd wanted to do is to trade, and as weird as it could sound, that's not as a professional trader with an investment bank that I could trade... I've known hundreds of professional traders, and I can tell you that 99% of them (including myself) joined the race in order to speculate (I don't know maybe because of the gambling aspect...), most of them (that still includes me) believed that professional trading was related to a large extent to speculation... Big mistake! Your job as a bank trader is to buy cheap and sell dearer with a minimum risk (bank traders have strong directional limits) and this in a more or less straight way : I mean when you work with more complex and structured products, the only difference is you have mathematical models that tell you what is cheap and what is dear, and your job is to manage your book in order to make sure that what you sold will ultimately be dearer than what you bought, that's the so called delta hedging, the old good Black-Scholes. I spent years to understand this and the fact I started in a prop trading desk for sure didn't help. Once again : bank traders don't "trade"

- Working with an Investment Bank won't make me rich (as a reminder I use Felix Dennis' definition of rich : the first level of riches, the lesser rich, starts at £15m). I know a few guys who managed to become "comfortable poors" and got a few million quids in their early 30s working with an IB, but the competition is extremely hard there and these guys had to be highly competent, work damn hard, "kill" tens of guys from Harvard with a 180-IQ who had done everything to work with IB since they're teenagers (basically the basic bank grunt) and most of all those guys had to be very very very lucky. I don't say that making money from speculation is easier, some days I realize my plan just expects to beat Soros' performance (I'll discuss this in a later post), but I say that I think that speculation fits me better : there's no waste of energy in political wars and no waste of time working for someone else that will be paid for your work
33 months, almost 3 years spent monitoring daily the markets and making hundreds of trades, and I still consider myself as an apprentice speculator but fortunately I've learnt a lot and improved on my way to become a Lord of Trading. The path is still long, so for now, happy birthday to my kid and happy anniversary to me!
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FYI As this post is published: SPX 1090 // SX5E 2721 // NKY 9240 // DAX : 6171 // EURUSD 1.2881 // USDJPY 85.27 // XAUUSD : 1221

Crunching the Voodoo

2010-08-04T18:07:00.003+01:00

I happen to look at what I call "Voodoo" tools : the indicators that seem to work properly while I have absolutely no idea why they do, for which I can't find no other rationale than they're just voodoo : among them are the Fibonacci retracements for instance. The reason is probably such tools are self-fulfilling prophecies fed thanks to plenty of guys who either believe in them or don't believe (or don't understand in my case) but trade them. Actually the reason why they work doesn't matter, what matters is they work : don't think, trade!

Among the voodoo tools I use for short term (daily) analysis are the Pivot points , inherited from the floor traders. From yesterday's low, high and close, a pivot point is defined (the average of the 3) and 3 support (S1,S2 and S3) and 3 resistance (R1, R2 and R3) levels and for a reason only The Lord of Trading knows, I've observed they do act as support-resistance... To illustrate this, the hourly chart of the EURUSD below shows for yesterday and today the pivot points (grey lines), supports (in green, S3 is not showed here) and resistances (in red, R3 not shown). Today (while the day is not over...), the R1 seemed to have stemmed the rise of the pair and then it looks like the fall after the positive ISM figures (positive for the USD) has rebounded at the pivot.

I've done some simple stats on the closing prices of the SPX and the ones (well the prices at 6.00pm london) of the EURUSD and looked how they located between the pivot points. The frequencies are shown in the table below :

Close                                 SPX                 EURUSD
Below S3                             4%                        1%
Between S3 and S2              9%                        6%
Between S2 and S1              9%                      13%
Between S1 and Pivot        20%                       30%
Between Pivot and R1        31%                       28%
Between R1 and R2           14%                       10%
Between R2 and R3           12%                         8%
Above R3                           2%                          2%

The table notably shows that 50% of the time for the SPX and 60% for the EURUSD, the closing price is between S1 and R1 and respectively 73% and 82% between S2 and R2. To be frank, I'm a bit disappointed by the figures as I thought there would be more significant (particularly for the S&P) and expected figures like 90%. As they are, it's not really tradable. Maybe I've not crunched the right stuff and not found the relevant stat yet, to be investigated further, but believe me, that's voodoo!

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FYI As this post is published: SPX 1123 // SX5E 2825 // NKY 9489 // DAX : 6331 // EURUSD 1.3140 // USDJPY 86.24 // XAUUSD : 1194

Operation "Absolute Trader"

2010-08-03T16:19:00.004+01:00

I've been focusing hard on 2 objectives lately :
- Make £100 million from trading
- Do 100 press-ups (or push-ups for American fellows) in a row.

I'm not sure which of those is the most difficult but I first managed to do the press-ups after I followed a 6-week program found on the web : http://www.hundredpushups.com/

100!!! I nailed them yesterday! Now it's done, I'm thinking I should have focused more on the trading as with 100 million quids I'm sure I could buy for myself Gerard Butler's body (while I understand he's more a 300 guy than only 100 :)) ).

Now the press-up thing (as the £100m quids one) is a part of the more general project of mine : become the ABSOLUTE trader (I mean even better than I'm now, not sure it's possible :))) ). Since I stopped running the Rat Race and started dedicating most of my time speculating for my own account, I've done well and my trading has dramatically improved. But not enough! I'm now in my career at a point where I've a lifetime opportunity to live a life under my own terms, (almost) no managerial pressure and most of all plenty of time which is arguably the most valuable of the commodities and I decided to optimize it and give all what I can to master the art of speculation. That's definitely the most difficult challenge I've faced so far and zillions of people failed before me but in my situation, it's just worth to try. In a few words : Sauros expects a performance near to Soros' , needless to say that's not gonna be that easy....

Operation "absolute trader" requires a very disciplined life, a lot of routines (I'm currently thinking about a list to start with) and obviously hours and hours spent to watch the markets and trade. It aims at my improvement in all the disciplines I think will give me an extra edge to trade : mathematics, statistics, econometrics, technical analysis, macro-economics, history, psychology and all what I'll find on my way (any suggestion is welcome). It also includes my being fit and healthy (that's where the link between press-ups and trading is) but this part is far more standard : good nights of sleep, 3 workouts a week a good diet will do it. My personal experience shows that the correlation between a good health and good trading results is very high and I tend underestimate it. Ohhh, last but not least, I'm not sure you noticed but I'm trying to post here on a more regular basis (almost daily) : blogging about my thoughts and exposing them to "public scrutiny" helps me to push my focus and analysis further.

Now back to my £100m objective, I just put on a long EURUSD (finally !) so I might be on the good way... the US could default and the dollar be worth nothing overnight who knows ? OK, OK, back to work...

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FYI As this post is published: SPX 1124 // SX5E 2816 // NKY 9694 // DAX : 6304 // EURUSD 1.3228 // USDJPY 85.92 // XAUUSD : 1188

The Long EURUSD and the short SPX of it

2010-08-02T15:44:00.002+01:00

The Long EURUSD and/or Short S&P 500 (SPX) position I've been eyeing for a month or so finally started to work last week and I managed to take back from the markets with a short SPX part of what I gave before because of bad market timing (once again!). The chart below shows the performance of a long EURUSD-Short SPX position, adjusted to match their daily volatility during July while so far, I've been trading one side or the other but not both.

Actually last week I was waiting for the right time to enter a long EURUSD position as there was a big battle around the 1.30-level and finally I shorted the SPX at around 1115 for a 1-ATR profit (a "quickie" trade)taken at around 1095. I chose the swing trade (fading the increase of the SPX) rather than the momentum one (playing the strength of the EURUSD) on technical considerations : my guess was that the 200-SMA and 50% Fibonacci retracement of the SPX would act as a strong resistance and even if they were to break in a close future, there would be at least a correction (if not a reversal) and there was room for a short term profit of 1-ATR (if the correction had some steam, I could always re-enter the short with a bigger size). On another side, my bet was that while the SPX hasn't cleared these obstacles, the EURUSD would struggle to clear break frankly the 1.30 and then more importantly the 38.2 Fibonacci Retracement. It looks like I got it not that bad that time.

But today as I'm writing, it looks like the resistances are being broken and this with the strength soooo typical of stop gunning (that smell of powder is pretty recognizable) : the SPX is around 1122 and the EURUSD close to 1.3170. It means the time for me to enter a long EURUSD may be very close, the only thing holding me back is I want to see how the SPX reacts after the break of those resistances, I think that at those levels, fake outs are very likely. This said, a strong advocate for a long EURUSD is definitely the RSI at 72 : buy the overbought and taking money from the gunned guys is one of my favourite play. Not sure how long I can resist the temptation.

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The One Ultimate Back Test

2010-07-29T15:32:00.002+01:00

Further to yesterday's post, I've kept the Excel spreadsheet where I computed the 10Y returns of the S&P500 for the discussion and it reminded me the precise reason why I started a few years ago to consider to "pound-cost-average" for my long term investments in stocks. This was to me the ONE ultimate back test : the Great Depression decade. If you invested in January 1929 and put all your money on the S&P500, 10 years later you would have suffered a loss of more than 45% of your equity... , but if from January 1929 onwards you invested every year 10% of your fortune, you would have ended up with a +12% return. That's a lousy 1% per annum but still better that a loss of almost half of your capital and of course one have to consider what happened during that decade... If a pound-cost-average strategy would have survived THAT, it should be totally bullet proof, right ? Well, my computations yesterday that showed that from 2000 to 2010 such a strategy would have led to a 5% loss mitigates a bit that point : the time and concentration of the crash years is as well important : in the past decade, the crash came in 2008 at the end of the decade, wiping out years of compounded profit while the Great Depression was a succession of crashes (including German recession in 28, the 1929 crash, bank runs and bank bankruptcies) that were concentrated in the first years of the decade 1929-33.

As Liaquat Ahamed wrote in the epilogue of his excellent book The Lords of Finance (The Lord of Trading highly recommends the Lords of Finance, seriously it's one of the best book I've read for a while), what happened during the Great Depression would be equivalent to see the mexican peso crisis in 1994, Argentina and Asian crises in 1997, the dot-com stock crash in 2000 and the 2007 subprime crisis (I'm not sure if when the book was published, Lehman had bankrupted yet...) happen during a 2-year period... That is pretty concentrated...

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Sauros could advise your Grand Ma

2010-07-28T14:19:00.006+01:00

A former colleague of mine in the Rat Race, ("Hey man keep on running, I'm sure if you work hard enough they'll give you a billion bonus"), a CFA, speaks like in the personal finance books and use "standard" arguments when it comes to investments and savings. Every time we happened to discuss about these, I felt like I spoke with the financial advisor of my grand ma. One of his commonly shared arguments to buy stock is that "in a 10-year period, stocks are ALWAYS profitable"... Of course, as good "Back Traders", we know that's not true, I did the maths quickly this morning : if you invested 100% of your capital on Jan 1st 2000 on the S&P 500 (SPX), you'd have lost almost a quarter of it on Jan 1st 2010 (or today as the stocks are today almost flat for the year) or if you "pound cost averaged" and invested 10% of your equity every year on the SPX you would be today roughly at a 5% loss. Not really convincing ...

Now, interestingly enough, if you invested on Jan 1st 2000 but you managed to stay out of the market the worst year of the decade (2008), your profit would be of +23% (2% per year), if you managed to avoid the worst 2 years (2008 and 2002), you would have returned +61% (5% per year). Nothing amazing there but still better.

So if I had to advise my grand ma on stocks investment I would say

- "Pound cost averaging", meaning investing the same amount of money on a regular basis, makes sense : actually it is a mix of averaging down the stock (grrrrrr) and pyramiding it (yeah...). While it's highly advertised by your financial advisors as it's a good way for them to take fees from you on a regular basis, the historical back tests, particularly in periods of turbulence, generally better results than if you invested one off.

- Grand ma, you should spend your time monitoring the markets, following the whole day the prices action, the night the futures and try to time it : try to get out before it goes down and get in before it goes up. The trouble is that bad timing can kill your performance if you miss the few trading days that builds your performance.

Well, maybe my second piece of advise is not very appropriate for my grand ma, but roughly that's the way I try to do it. I managed to get totally out of the stock markets in early 2008 (a week or so before Kerviel), thanks to the Lord of Trading and I started to go back in on a pound-cost average basis since early 2009. In early 2010, I switched my holdings to SJP Far East Fund investing in Asia (including Japan), and I got out and went for cash end of June. The reasons for this is first, I was considering that the risk of the global Economy fell in a double dip was high (looks like I was wrong on this) and secondly as the FTSE Asia-Pacific index, the benchmark of the Far East Fund broke its 200-SMA. For this type of investment, I consider basic technical analysis set-ups will just work fine, for instance : "buy above the 200-SMA and sell below"

The question of the day is whether I should come back to the Far East or not? Well maybe. I will stick to the 200-SMA strategy applied to the FTSE Asia-Pacific (in GBP while the index is quoted in USD) as it's testing now its 200 and 50 SMA and wait to see if the S&P 500 manages to break its own 200-SMA too, the US stocks rules the world's stocks...

So the action is once again : wait and see. Wait ans See on the short term swings, wait and see on the longer term investments, you can easily imagine how my days are boring ... ;)

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Don't go on Holidays until you're a Billionnaire

2010-07-27T15:29:00.003+01:00

July will be a bad month for my trading. I've started the year pretty well, long on the rise, short on the falls, but since I returned from a vacation in early June, I've been struggling to make serious money out of the markets and it looks like I've lost the right timing... My wife won't like the lesson : Never go on holidays if you're on a winning streak... or alternatively and you won't like the lesson : don't go on holidays until you're a billionnaire.

I was short the stock markets this month : wrong. If you remember (if not, just scroll down) the rationale for the position was further to the debate between "austerity" and "growth", I've been thinking that the wave of austerity in Europe and Obama struggling to impose more support to US Economy is reminiscent of the mistakes done in the past before the Great Depression and I believe they can lead us back to a profound recession. I still stick to this argument but my timing for a short position was definitely wrong as this can spend months (or even years) before we know the impact of such policies. Knowing that nothing is more difficult (and more funny I've to confess) than trying to pick a reversal, the loss here was limited to 2-ATR. The Sheriff I underestimated and I forgot in my argument was the FED (how could I miss IT) : Sheriff Ben is still able to ease, he still veils, the finger on the QE trigger even if Sheriff Obama runs a bit out of ammunition (politically). Another thing I overestimated and that harmed my short is the negative impact a strong dollar during the 2Q would have on the earnings of the American companies, mininal apparently...

On the other hand, I've been a bull on the EURUSD. This call was not that bad, since I developed the view it has reached a couple of time 1.30 from 1.26 and is fighting around as I write but unfortunately, despite a growing conviction that the EUR would strengthen, I' ve stayed aside and not traded the pair yet. The thing is I was expecting the results of the European stress tests on Friday to be considered by the market as "too easy and not stressed enough" to enter a long on the dip. What happened is the EUR slumped on Friday BEFORE the results as the tests were said to examine the banks' trading books only (while most of the exposures lie in the banking books) and then, after the results were announced the reaction was muted, to finally jump back to 1.30. In other words : I just missed the target window.

As I write, we are testing important technical resistance levels on those two markets : the 200-SMA and the 50% retracement level of the S&P 500 and the 1.30 mark on the EURUSD, and those resistances can see several fake out before they break (if they break...). So for now, I'm still staying aside, waiting again for the right moment to enter the EURUSD as we are close to one of my favourite set-up : "buy the overbought" (or "sell the oversold" works well too) : the EURUSD is on the verge of the overbought now and the set-up is about to be trigerred so Patience, Patience...

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Summer Sales on Shorts Soon ???

2010-07-09T15:22:00.003+01:00

Well, let's say the things are not really going for the best for my short stock index position initiated on June 29th... It started not so badly and I made a 1-ATR (Average True Range) paper profit before the stocks initiated a rebound on July 7-8th which has some kind of strength. I don't want to face a train coming (I've already taken too many of them, it's a bit unpleasant each time) and for now got out of the position with a loss equivalent to around -0.5 ATR. That's a so-called "whipsaw stop" : while for a given position my risk is of 2-ATR, I believe I'll be better off taking a loss between -0.5 and -1 ATR and get back to the position when (and if) the price comes back to my initial traded price rather than having a 2-ATR stop. I'll have a higher percentage of losses but I expect to have a better expectancy. Keep in mind : focusing on a high percentage of winning deals is a mistake and any percentage above 60-70% should be watched suspisciously as it probably means that the profits are taken too early and ultimately a few huge losses will wipe you out.

Now, back to the bearish view I've started to develop : the more the things go, the more I'm convinced that the mistakes from the past (meaning the Great Depression) are repeated : focus on a balanced budget and on deficit cuts while the economy is still weak, the unemployment high and I think that ultimately if we don't change that, we will return to recession soon. I think Obama has it right and growth has to be priviledged but I'm afraid that he came to a political dead-end and won't be able to support the economy further as it should be. Back to 1932, Roosevelt managed to devaluate the dollar breaking the then sacrosanct gold standard against everybody including among his advisors, the FED, the Treasury and the whole world. Today, Obama lacks the strength to impose more support and to save the world from a double dip recession. The current rally seems to indicate that the time has not come yet for the slump and that I'm probably too early in my short position, but my scenario, which I sincerely hope is wrong, can spend some time to confirm itself and I want to build my position progressively. One week ago I had the feeling, maybe wrongly, that around me, the whole world was bearish and further to the recent rally, the crowd may now be more divided (I start hearing more and more bulls), cheapening the short positions. This said, if the rally is fed by the expectations of a good earning season, I'd said that a lot of it is being discounted now and frankly I can't see outstanding results with a strong dollar, the EURUSD was below 1.30 during most of the quarter : it might soon be summer sales on the shorts!

In the meantime, I've recently missed a good opportunity on the Forex as I was focusing mainly on the stock markets : it concerns the EURUSD for which I was pretty bullish and still am. My argument to bet on a rise of the pair used to be that on the one hand with European (Germany particularly) tightening and putting efforts on "Austerity" while on the other hand the US wants to keep it easy and favours growth, and that fundamentally would drive the pair up. This argument is not really valid anymore because the advocate of supportive stimuli isn't the US but Obama, and as we discussed above, he struggles to impose it. My argument in favour of a rising EURUSD now more lies in the market action. Remember last winter, in Dec 09, we had been used since March that year to assume a strong correlation between a rising EURUSD and a rising stock market, it was what we called the risk aversion / appetite play. Remember ? In December, the EURUSD was above 1.50, and it seemed like nothing could stop the pair to reach the 1.55-level and above. Suddenly the December Non-Farm Payrolls (NFP) posted a positive surprise (less job cuts than expected 5-11k vs -126k expected) and as expected the stock market jumped but at the very opposite of what we were used to, the correlation between EURUSD and stock markets broke and the currency pair began its slump from 1.50 to 1.42 then to 1.20 with the stress in the euro area in 2010 as the health of the US economy at least compared to the European ones, was reflected in a strong USD. To me, what happened on July 1st after the ISM manufacturing is a bit reminiscent of, or more precisely mirrors what happened after the NFP in December 09 : for months we have been used to see the EUR fall with the stress on the european sovereign debt and to a large extent, we (me at least) associated again the EURUSD to the stock markets in once again a kind of risk aversion play : the EUR falls and strengthen with the stock markets. On July 1st, the ISM manufacturing data showed a negative surprise, sending the S&P 500 to a bottom and in the meantime the EURUSD jumped from 1.22 to close to 1.25 and it reached 1.27 as I'm writing a few days later. The correlation broke once again and this could signal a strong move of the EURUSD upper (1.30, 1.40. 1.50 ???) as the european troubles potentailly to come could have been already discounted and the world could focus bad on the not-so-strong US economy. We could be in a situation where concerns about Europe ease and the EUR strenghten or the concerns about US deepen and the USD weakens, in both case that would favour the EURUSD. If I'm right I may have missed an opportunity but it's not too late : a long EURUSD could be a perfect addition to my short in equity indices...

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One step in the Bear Side

2010-07-02T17:27:00.003+01:00

As I wrote in my previous post, the Bear side is strong with me and I'm afraid I've finally stepped in again. Just one foot for now...

In my previous post, I was quite proud of the performance of my holdings in an asian equities fund in GBP (+8-10% for the year). But on June 29th in the morning, just a few hours before the big slump in the stock markets as there were concerns about the Chinese growth, I asked the asset manager to get me out as these profits vanished to something close to 5-6%, -3 to 5% in a couple of days, it's going fast (and I've not checked yet where the order has been executed, probably a couple of percent south)... On that bucket, the managed equity funds one, I'm now 100% on UK Gilts, let's say that the default risk of the UK remains acceptable... for now ;) The same day, I initiated a short position on the DJ Eurostoxx 50 (SX5E) at around 2570, the first of several if things keep on going badly. As one can see, one clear advantage of minimum diversification is flexibility : in a couple of hours, a fax and a few clicks and I'm able to switch from long to short my whole position.

Back to the last summer, the main argument for me being bullish was the way the Sheriffs, governments and central banks, were coordinated to fight the crisis with a set of stimuli, measures and the will to put whatever it takes to recover. To me, the name of the game used to be "Don't short the Sheriffs", but is it still the case? The reason why I stepped from bull to bear is not only because in the debate between "austerity" and growth as I discussed in my previous post, I think Germany is wrong, but mainly because of the de-synchronisation of opinion and action among the Sheriffs, particularly after the last G-20 meeting that I found accomodating for both parties and ruled nothing out. That's enough for me to stay on the sidelines with my managed funds and start testing the market with a short position on a stock index.

Actually to be frank, instead of shorting a stock index, I considered in order to reflect my bearish view to short the EURUSD as Germany's tightening could harm ultimately the Euro (that's the recent Soros' point). TLofT forbids. Fortunately for me (as the EURUSD jumped from 1.22 to 1.26 as I write in a couple of days), I estimated that as the European started tightening while the US kept on easing, the pair was fundamentally due to rally : EUR to strengthen, the USD to weaken. On this, I was probably right for the wrong reasons, it looks like the USD weakness came after the bad figures from the ISM on July 1st, highlighting a weak growth in the US. It seems the correlation we've had between the stock markets and the EURUSD broke : the EURUSD jumped while the SPX slumped. I could have been killed on this one.

Another trade that could have crucified me is on Gold as I considered to add more on my long position. The rationale was that in the case the market drop significantly, my bet was the safe haven role of the gold would prevail and whatever the direction of the EURUSD, the "short USD" role (as a commodity) or alternatively the "short EUR" role (as an alternative currency to EUR) of the precious metal would help its rise. I was dead wrong on this, it looks like only the hedge to EUR role accounted and Gold lost almost $50 (!!!) on July 1st as the EURUSD jumped.

That's two big bullets I dodged in a few days and so far my choice of shorting a stock index to reflect my view seems not too bad but it shows how the Bear path is slippery.The real danger with a short position is to be shot by a Sheriff so if you have to join the Bear side, move step by step.

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Dona Merkel Quichotte vs the Mills of Inflation

2010-06-28T14:54:00.003+01:00

We might be at a turning point. As you may know, I've started the year with the Bulls and my main argument was that the Sheriffs, governments and central bankers "worldwide", having learnt the lessons from the Great Depression would do anything possible, whatever the price is, to make sure the recovery would sustain. It may be time now to re-assess this view and it might be the time for the Bear Lord to come back. Since the very beginning of the crisis, I've been thinking that the better way out was to articially create some inflation (or at least prospects of it), thinking that ultimately this inflation once started could be controlled with the modern tools the Sheriffs have handy (or not but it's not the topic now). A few weeks ago, the situation as I could see it was a battle between two different groups of countries, those whose interest is the fight of deflation notably the US, Europe and Japan and those whose interest is to fight inflation, the emerging countries eg China and India. My bet was that ultimately, the fight against deflation would prevail but the recent moves tend to show I was wrong on this.

On the one hand, China announcing it would "enhance" the CNY rate flexibility and signalling the end of the peg of the CNY to the USD is to me a move in this battle. It's also good news for my equity funds position. As a reminder, I've switched in January 2010 most (I hate diversification) of my managed funds holdings to an Asian equities fund, the Far East fund managed by Aberdeen. The idea was to profit both from the stock growth and on the asian currencies appreciation (the fund is in GBP) and so far, the strategy has more or less paid off (I'm about +8-10% off on this). There's on bloomberg an excellent comment from William Pesek regarding the chinese "chess" move :

- It allows China to shut the mouth of some Americans that tend to make appear the undervalued Yuan as the root of all the US problems. "Go and find another scapegoat"

- The rising yuan will help China (along with other asian economies) to stem asset bubbles, increase Chinese purchasing power (hey there are 1.3 billion guys there) and reduce inflation risk.

On the other hand, the recent moves towards austerity and budget cuts seen in Europe, Germany and UK, show in my opinion that some are not fighting the right enemy : they fight inflation while they should fight deflation. As Desproges a famous French humorist put : "The enemy is stupid. They say that we are the enemy, but the enemy, that's them!". Seriously, it sounds to me like Dona Merkel Quichotte fighting against the mills of inflation. I'm not sure where she has seen inflation. Put deflationary measures and you may get some deflation, while the crisis is not over, look at the unemployment and the double dip in the US house price.. This debate between austerity and growth is currently the hot topic, including at the G-20 meeting this weekend and the media and the web are loaded with tons of arguments for the two camps. I won't add any arguments here, you know in which camp I am. I'd just say it's to some extent reminiscent of what happened in 1931 when, while the country was in a Depression further to the crisis of 1929, the UK government decided to raise taxes and cut unemployment benefits while close to 20% of the workers were unemployed in the name of a balanced budget. The summer 1931 was the turning point where the crisis that started in 1929 turned into the Great Depression. We have to keep in mind the lessons of History.

Now to be frank, I've not totally joined the Bear side yet (but I'm close, the Bear side is strong with me) as the US are (in my opinion) on the right side and they're still ruling! As in any (bad) hollywood scenario I expect they will save the world once again. This said, the situation has to be monitored closely as I think the game is playing now.

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The Gain of the Year : 1-ATR

2010-06-18T16:21:00.003+01:00

It may be surprising but the main profit I made this year isn't the +380% performance I achieved on stock indices the first five months. It lies in my stop loss system. Let me detail a bit further. I use so-called "Volatility stops" based on the daily Average True Range (ATR) technical indicator. Technically, the ATR is the exponential average of the daily range (high minus low) taking into account the opening gaps, in more "normal" words it measures the daily volatility in points for a given market. For instance as I write the ATR(14 days) of the EURUSD is at 0.0152, meaning the average daily move for the pair from high to low is of 152 pips.

When trading, what you want to avoid is to be stopped "by the noise" : have your stop loss triggered just to see the market ultimately going in your direction... without you... Being right and lose money is definitely the worst thing. The trick is to try to define a stop loss level that's beyond the noise level, that is trigerred only when you're wrong on your position. Roughly, if you assimilate 1 ATR to a standard deviation and assuming some normal distribution (which is contested but that's not the debate here today), I'd say a fair stop level to avoid the noise is probably between 2 and 3 ATR.

For a while, I'd been using myself a 3-ATR stop (trailing or not depending on the specific case) until I looked at my blotter and analysed my own past trades. I've found out that almost all (more than 95%) of my winning trades had a worst adverse movement below 2-ATR. In other words, if I had a 2-ATR stop instead of 3-ATR, most of my winners would have remained winners and almost none of them would have been stopped. The conclusion then was obvious : I switched and now I'm now using a 2-ATR stop loss system and that's how I'm now saving 1-ATR on all my losers, which is a really huge gain.

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