Trading Style

I get asked a lot about my trading style. To be honest I haven’t really set out to develop one specifically at all, but after 30 years trading markets, I have realised a lot of what not to do.

First I tried fundamental trading, poring over statistics, money supply, interest rates unemployment numbers etc etc. When the Berlin wall fell, every economist predicted that unifying East and West Germany would cost billions and take decades. This was bad for the Deutsche Mark, and so on the fundmentals anyway the DEM was a sell. And yet we saw a huge and prolonged rally in the DEM, purely on the exuberance of the reunification of Germany. So fundamentals clearly did not always work, and emotions sometimes do.

Then I switched to charting and did the lot. Point and Figure, Moving averages, Stochastics, Momentum, Elliot wave, Fibonacci, you name it, I tried it. Bought the books, did the studies, bought the models etc etc. Sometimes they worked, sometimes they didn’t. Sometimes the pattern was so clear after the event, and rarely did it repeat.

Then I tried money management, and stop loss orders, take profit levels, risk analysis etc etc. I followed the reasoning that it was better to run your profits and take losses quickly etc etc.

But it was when I was watching really rich people in the markets that I realised the real truth:

It’s best not to care about the trade at all.

I have seen people with bad positions. They don’t panic. They don’t get out. They just wait. If the reason for doing the trade is still valid then they just wait. If the reason is not valid then they get out, whether a profit or a loss is realised or not.

The old adage still works: Money makes money. If you don’t care about it then you are unlikely to panic and get out at the bottom or the top . You just wait.

So I started out with small positions that I could ignore, and built up from there. I realised that all the styles are only tools to help you make a decision, and that it was my own fears that I had to understand really.

My style is to decide a trade and take a position and then just wait. I decide on fundamentals, charts, gut feeling, and a mixture of all the above. But I only get out when it feels wrong, not when some specific chart or fundamental stat starts going the other way. And even then I am reluctant to quit a trade quickly. I have seen people get very rich just by waiting for the cycles to turn again, and they do eventually.

I just wait…and you know, it usually works!

...and in between I watch a lot of cute blondes!!

Some contrarian comment on the USD...which agrees with my views!!

NEW YORK, Dec 4 (Reuters) - The reality of low interest rates and deep economic recession should finally start to catch up with the U.S. dollar in 2009, after risk aversion and de-leveraging helped push the currency to multi-year highs.

The advance -- which has pushed the dollar up almost 20 percent against a basket of six currencies since July -- is "artificial" and may subside once extreme risk aversion eases and global markets stabilize, analysts said.

"Foundations for the dollar's recent rally have not been solid. The result of repatriation, deleveraging, quantitative easing and a major scarcity of dollars," said Bob Sinche, head of global FX and rate strategy at The Bank of America in New York. "But now we are bound for a correction."

Sinche said euro/dollar may be trading at 1.38 by the end of December and that the dollar may rapidly dip to 1.44 to the euro by the first quarter of 2009 before the pair resumes a "more gradual sell-off."

The European currency was last trading in New York at $1.2804 compared with a record high of $1.6038 touched on July 15. Demand for the greenback rose as the financial crisis deepened and even as the Federal Reserve cut interest rates while the economy slowed.

"The dollar was at the receiving end of leverage flows and also concerns about the euro zone's ability to navigate its first systemic crisis," said Daniel Katzive, director for global foreign exchange at Credit Suisse Securities in New York. "But the U.S. currency is no longer very cheap. Actually, in same pairs, the undervaluation of the dollar has been erased remarkably quickly."

Goldman Sachs' senior investment strategist Abby Joseph Cohen also said on Thursday the U.S. dollar now is about at the level "it should be."

Katzive at Credit Suisse added it may be premature to call the end of de-leveraging and that price action in euro/dollar may be choppy until the end of the year.

However, he said extreme risk aversion is beginning to show signs of easing. And that combined with lower rates and a weak economy, this should start to add pressure on the dollar. The bank forecasts euro/dollar to trade as low as 1.23 in the near term but rebounding to 1.37 in about six months.

In a sign risk may be easing, most currency strategists in a Reuters poll released on Wednesday said they expect volatility in the euro, sterling and yen against the dollar to decrease in the next few weeks.

The poll implied monthly annualized volatility of 14.8 percent for the euro against the dollar in December, down from the 23.6 percent seen in November.

"If the equity markets manage to hold on to some of its gains, with some relaxation in risk aversion, we may see a pullback in euro/dollar," said Tom Fitzpatrick, chief technical analyst at Citigroup in New York. "Some weakening in the dollar is not inconceivable."

RATE CONVERGENCE
Still, for many analysts, the outlook for the dollar in the next couple of months will depend greatly on the impact that lower benchmark interest rates across the globe will have on multiple currencies.

Most major central banks have been cutting benchmark rates, aggressively trying to revive local financial markets and economies since the global financial crisis deepened in September.

This week alone, the European Central Bank, the Bank of England, Sweden's Riksbank and the Reserve Bank of New Zealand all matched or exceeded easing expectations at rate-setting meetings.

Earlier on Thursday the ECB cut interest rates by 75 basis points in its biggest move ever. Its main refinancing rate now stands at 2.50 percent, the lowest in nearly 2-1/2 years, but more than double the U.S. Federal Reserve's benchmark rate at 1 percent.

But while some analysts like Katzive at Credit Suisse expect interest rate differentials to gradually weigh on the dollar in 2009, others argue a correction won't be immediate.

"Global yield differentials are collapsing and it is perhaps just a few months before rates in the eurozone and the UK fall very close to the US rates," said Vassili Serebriakov, a senior currency strategist at Wells Fargo Bank in New York.

"But while rate convergence could remove some of the recent support for the dollar, once financial conditions stabilize and risk appetite returns, the yield attraction of currencies such as the pound and the euro over the dollar is likely to have disappeared," he added.

Wells Fargo forecasts euro/dollar will be trading at 1.26 in six months and at 1.28 in one year.

I have a lot of time for Abby Joseph Cohen -- KT

NZD/JPY Trade

Added another trade:

Bought NZD 1m Sold Yen at 49.25, thus making position long NZD2m at average of 54.54.
Review level 41.87, being long term lows.

USD/JPY deals still in the deep freeze!

Interesting article on intervention in the Yen

TOKYO, Dec 2 (Reuters) - Nearly half of major Japanese firms want authorities to intervene to prevent the yen from rising beyond 90 yen to the dollar, to support Japan's export-driven economy, a Reuters survey showed.

The yen hit a 13-year high of 90.87 yen to the dollar in October, and traders say it may climb past such a level in coming months, as investors continue to shun risky carry trades due to credit market turmoil and fears of a global recession.

"A recovery of the export industry's earnings is important for the Japanese economy at this stage," said a company in the services sector.

Japan slid into its first recession in seven years in the third quarter as exports crumbled.

Exporters have been the main engine of growth for Japan's economy, but data released last week showed that manufacturers have forecast their biggest ever quarterly fall in output in the fourth quarter, fuelling worries of a deep recession.

The yen's historic jump in October was partly due to the unwinding of carry trades, in which investors sell low-yielding currencies like the yen to fund investment in higher-yielding currencies and assets.

Asked whether they wanted currency intervention to prevent the dollar from falling below 90 yen, 97 out of 213 major firms that responded, or 46 percent, said they hoped for such action from Japanese authorities.

Sixteen percent, or 34 respondents, said they did not want intervention while 39 percent, or 82 respondents, said they did not have a preferance.

In a separate query on the chances of yen-selling action by Japanese authorities, 65 percent of respondents said they thought Japan would intervene if the dollar fell to 90 yen or below, while 35 percent said they were not expecting any intervention.

Among companies that expect such intervention, 44 percent said they thought there would be intervention if the dollar falls below 90 yen, 29 percent said a dollar slide below 87.50 yen would trigger such action, and the remaining 27 percent thought Japan would wait until the dollar falls below 85 yen.

Some respondents said currency moves should generally be left to market forces, but added that intervention may be needed to curb sharp fluctuations.

"Trying to avert sharp swings may be necessary, but it would be better to avoid intervention if possible," said a company in the oil, coal and ceramics industry.

Others were sceptical that solo intervention by Japanese authorities would be effective, and some questioned whether foreign exchange intervention was the right response to the turmoil in markets and the global economy.

But a transportation machinery maker, which said it wanted authorities to intervene to prevent the dollar from falling below 90 yen, added that the biggest worry was how long the adverse economic conditions stemming from the financial crisis would last.

"Once we escape this situation, foreign exchange conditions are likely to return to natural levels. In other words, the concern here is the time required to shake free from this situation, and this is not an issue that can be resolved through foreign exchange intervention," the company said.

Japan has stayed out the market for more than four years, the longest such stretch in Ministry of Finance data going back to 1991.

Japan sold 35 trillion yen in the 15 months to March 2004 on concerns that excessive yen strength could dampen overseas demand for Japanese exports and hurt the economy.

As I have said before, below 90.00 and the BOJ will act. KT

NZD Trade

Could not resist!

Bought 1m NZD sold USD at 0.5515.

Will review at 0.5100 and 0.6100.

See earlier post as to why.

NZD/USD thoughts

The NZD/USD has fallen from the highs of 0.8216 on 27 Feb 2008 to lows of 0.5191 on 20 November 2008, a fall of over 30 cents, or 36.81%.

The average move from high to low (in a calendar year) over the last 17 years is 15%, with the greatest move being in 2001, of 26%. So the NZD/USD is clearly oversold, by any measure, even bearing in mind the turbulent offshore markets.

There are three main drivers of the NZD/USD:

Capital Markets
I was advised last week by a major bank that in their view some 40-50% of the normal foreign exchange volume is absent from the markets due to volatility and the lack of M&A activity. I believe that a good deal of the offshore investment present in New Zealand over recent years has departed our shores. Corporate offshore investors simply would not stand by and watch a fall of the above magnitude without hedging or withdrawing funds. The key barometer of this is the NZD/JPY, which has fallen nearly 40 cents from the highs of 88.10 to lows of 48.69 or 45% this year, a record move that surely means they have departed New Zealand for now.

Importers
The import community has been engulfed with a wave of global negative news, and lower forecasts from the various banking forecasts. Hence many have taken large amounts of NZD/USD cover, not dissimilar to the events seen a few years back when they covered some years ahead. The key time of the year for importers is right now, Christmas, with the bulk of payments for Christmas stock occurring in November and December. The import community is largely fully covered in the NZD/USD, and their selling of the NZD/USD will diminish as we move into year end and they go on holiday.

Exporters
The vast majority of exporters have low levels of cover. Manufacturing exporters have various levels of cover but all the agricultural and horticultural exporters have low levels of cover, firstly because their season has yet to begin, and secondly they are waiting for lower levels as indicated by the banking forecasts.

So with the capital market players absent, and the importers largely hedged, who of substance is left to sell the NZD/USD? If the rate starts to rise then importers will only be in a position to watch, and exporters will be scrambling to hedge export receipts, as we go into the thin markets in January. There may even be buyers attracted to our (still high) interest rates given that the rest of the world will be closer to zero, even if we have dropped another 1% next week.

Buy NZD/USD!!

Stop Loss Orders

I have been asked why I don't use stop loss orders.

Stop loss orders are an order to cut a position when certain levels are reached to stop the loss getting any greater. I don't usually use them.

I do use "review levels", which are internal levels that I use to re-assess whether the position in place is still valid, or whether to just cut and run. The recent huge volatility in the markets are a case in point. The fall in the USD/JPY was nasty, and at 90.00 I would have been looking at some big losses.

So before it got that bad, I took some alternate positions as follows:

Original trades are 3m USD long short Yen at 103.10. (1m 105.66, 1m 104.00, 1m 99.64)
I sold USD1.5m bought Yen at 96.72 on 23 Oct and again sold USD1.5m at 97.21 bought Yen on 24 October (average 96.97) thus making the overall USD position bought and sold, but essentially square with a loss between the 5 trades of Yen18,390,000 or USD189,646.28.

So effectively I have locked in the loss and the 5 trades are in the "deep freeze" until I close them out or take the hit.

What I am looking to do is cut the 3m at under 96.97 and take a cash gain, with a greater unrealised loss on the original trades, then look for the USD/JPY to move back over 103.00 to make a profit overall.

But need equity markets to calm down first, so still waiting. But these trades are not what I would normally do, but when the markets are so unruly, protection is the best policy untill all calms down.

Still have the NZD/JPY carry trade, will add further if we see a move to 51.00, as I see this cross getting back to 80.00 over time.

Review levels are 90.00 in the USD/JPY and 50.00 in the NZD/JPY.