Quora Question: “How long does it take for a newbie to learn Forex trading from scratch if he can dedicate 15-16 hours a day?”

post on February 19th, 2019
Posted in Trading Tags: , ,

I recently answered the above question on Quora.

” I won’t know how long it will take you. It took me 2 years for forex. Maybe I am slower. There are many elements to learn in trading in order to be consistently profitable – understanding market structure and determining the edges are just two of many. Money management, trading psychology, trading plans are also part of a plethora of learning required. Your personality, your emotional, financial support, and how you devise your learning also affect your ability to become a profitable trader.

Allow me to share my personal experience – hopefully it will provide an alternative angle.

Trading 15 to 16 hours a day, even in training mode, really screws up one’s life, so I don’t recommend it. (I did 7 days a week, averaging 15 hours to 20 hours days – over the weekends, I was catching up on reading, preparing charts, reviewing notes and strategies, reflecting – I was learning to trade 24 hour timezones, and 2 other markets beside forex. All these took me slightly more than 3 years from the day I started. )

It was a really wild ride, and draining – mentally, emotionally and physically. But every time I climbed back up, I grew stronger in every way. (But physical recovery took longer – that’s why I don’t recommend it.) I had the support of my family which helped me weather the ups and downs. I was also a different beast, and I had planned to learn trading years before. So I prepared financially, discussed with my wife, achieved much of my job goals, and when the time came, left my job and started to learn trading. (I had tried to learn trading whilst working – but work responsibilities were my priority so my trading did not progress significantly). Even so, my original plan – stupidly – was to achieve trading success in 1 year – ha ha ….

All that started in 2012. I now trade a few times a week, or once every 2 weeks – whenever the markets present opportunities. Trading in any timeframe can be profitable if you know what you are doing – short and longer timeframes offer different challenges and risk reward scenarios. Yes I benefited from trading, and will always be able to do so. But it has never been my long term plan to trade forever, so I spent the last 2 years learning to code, design and am automating my trading processes so I can move on to other challenges.

Learning to trade is a heavy commitment – be sure you know what you want.”

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Why I Could Not Stick To A Trading Plan?

post on June 11th, 2018
Posted in Trading

Whilst drawing up the trading plans I analyzed edges, key price levels, expected profits/losses, trade management, probabilities etc.  After the trade has been executed, I became obsessed with the P/L (profits and losses).

Traders  who focus on the P/L will likely swing with changing short term accounts of the market environment. They will lose focus of the overall picture and edge they had gone in with.   Their minds dance to the rhythm of the marketplace, and the beats drown out the rationale of their original trade. They build a case to sabotage themselves and toy with  tactical decisions that run contrary to the original plan.  This is particularly true of resourceful traders who possess agile mindsets and analyse how markets constantly operate.  They become entangled with trade management issues during the trade.

Trade management should be part of the earlier trading plan, not created during the trade, and only touched on when key points of the plan are materially affected.    Addendum frustrations, and emotions like greed and unwillingness to end the day with a loss etc change their views of the original trade.   They become stressed, and lose the consistency of looking through the same lens they had used for making the earlier trading plan.   A wise trader once shared “we act to reduce our distress rather than maximize our opportunity”

The perspective I had whilst developing my trading plans was different from what I became engrossed with after trade execution.  Changing that was monumental in helping me turn the corner.


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Different Roads To Rome

post on April 24th, 2018
Posted in Trading

Late last year, I asked a reasonably established trader friend if he would take 60% return per annum on equity with low risk strategies (aka close to no equity loss for the year).  He was reluctant as he spiraled towards 5 to 10% return on any single trade, perhaps even 20% on a good day.  His risk factor would be 3 times higher than mine, and might crisscross the market average.  His efforts would probably be 10 times less strenuous than my strategies.

I however, will never be like him, and not because I have not tried.  But we were born and forged in different temperaments, and have different agendas.  I did not intend trading to be an eternal career.  He would trade to his last day.  I wanted to pass on a system of learning and flexibility that my children can use at their discretion.  He wanted to hone every instinct in his body to naturally respond to trading opportunities.  I on the other hand, minimized internalization and opted for intellectual drivers that may be automated in a system.  He can trade different strategies, anytime of the day.  I trade any instrument any time of the day but stick to a system of largely independent wheels and nooks.  Both of us wisely use leverage to our advantage and are never exposed beyond our comfort zones.

My varied systems share three overriding criteria –

1)      Complete independence with no reliance on any source of information and influence, and can be deployed according to changes in the markets.

2)      Employ hard work to reduce risks.  Hard work can be automated, risks cannot.

3)      Never lose sleep using low risk strategies and money management.  This also means it targets equity enhancement and is not regular income driven.

Can anyone combine our different personalities?  Yes, but from a value : risk efficiency angle – such marriage will dilute the merits of each system.

Hence it is important we develop and fit a trading system according to our natural inclinations and goals.  If they do not align, change something.   And do not lose sight of the results you are contented with.





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Are You Trapped?

post on July 29th, 2017
Posted in Trading

(Found this interesting article I wrote a few years ago whilst cleaning up old hard disks.)

Worry  the market has been too good?  Not sure economic growth is really turning round … but do not want to miss the ride?  With so many indices towering towards the sky,  surely the sky will not fall……  Are there not many faithful riding the upstream together ….. to the  precipice of a waterfall?

Emboldened by fellow believers, market pilgrims bravely battle pessimism and disbeliefs, holding onto the winning faith, encouraged by every victorious rise, even a blip.  But the markets are treacherous waters, and sharks are circling round.  They know how we think.  They smell that drip of fear, that nuance of uncertainty.  They like us this way – the fatten sacrificial calf for juicy bits of pleasure.  Indeed when the feasting begins, there will be no reprieve.

The staunch investors and gamblers alike are cornered,  the stakes have been played, ….. and our emotions  are now stringed to the market puppeteers’ whims.

Long term investors are you?  Well longsuffering has its weakness too.  Long  term commitment and  long term  memory failure are often bosom friends.  We hate to be reminded of the many funds which failed and the esteemed institutions which needed to be bailed out in 2008 and 2011.  Many blue chips have not since recovered their initial glory and many crown jewels  have  turned into less worthy gems .   Many seniors have lost their savings and pensions, and even countries have gone bankrupt or are tethering on the brink.  Yet the indices continue to goad us on.     

Have we not learnt?  Hugging an asset over a long duration does not safeguard it from value decay.   A wise man asked this revealing question, “how many top 50 Asian companies in the last 30 years, are still at the top today”.  For me that settled the issue.

Warren Buffet?  My grandmother?  Sure they are success stories.   Value investing is well advised but difficult to practice.  Buy during a crisis, when emotions strain against every ounce of logic?  Do incremental purchases over a long period of time?  Buy into a fund managed by a reliable bank … ha ha, …. that is a good one.  How do you judge whether the company is indeed undervalued, or over valued?  Follow industry valuation …  at that point in time?  Follow a guru that has made great calls in the past?  Follow the advice of analysts – never mind many readily reverse their target calls, even though they should have known better  – just look in the month of February for incriminating examples pretending to be intelligent diligence.  What to do?  Who to believe?  Know your candidates well, and buy only what you know, and if you know enough of Warren Buffet’s style, you will also know he is first and foremost a businessman … that is why he is a good investor.  So pretend to be Buffet all you like, and some of you will succeed, and I hope it is you.  But what if you get it wrong?    

Be your strategy one of resigning  from cradle to grave, or zealously swinging from treetops to treetops,  honest, competent  financial advisors will always tell you to actively manage your portfolio and watch it like a hawk – they are not going to be responsible for it – remember it is always “at your own risks”.

You are disciplined?  You mean that infamous stop loss or the rather clever trailing stop?  Often used, always to great effect – for relief or depression.  They are not  always practical or often not intelligently implemented.  I shall not go at length dissecting the merits and grievances of a stop.  But consider these questions –   How does a long term investor reconcile a stop loss?  Should not he simply weather the ups and downs, with the forbearance of a God ?   Where is the right place for a stop loss/trailing stop?  At 2% from support/resistance?  Too little?  10%?  Or when price corrects in a “wave”  rebounce?  Wait, perhaps it should be at the point our investor can preserve his capital, rescue leftover profits, or  at his final or stepped tolerance point for losses?  Ah, what if the stop loss is hit, but the price pattern shows conflicting signals… what to do? Here is another good one … “place a stop loss where it is unlikely to be hit, and if it is unfortunately crossed, then you know you were lucky to put it there..”  Yes, we get the picture, so we do whatever works best for us, if we actually muster ourselves to do it, ….   but we are disciplined are we not?  

A stop loss can be as fickle as when “ I have enough!”, or as sophisticatedly tied to the markets via probability studies, moving averages, Elliot Wave theories, price action, and so forth.  Notice the market itself does not generate a stop loss or take profit exit.  A stop is designed by us, according to our tolerance ability.  It is imposed to create order in an otherwise haphazard market.   It was a tool totally of our own creation – to manage ourselves.  Surely we can do better if it is to manage ourselves.

Equities remain one of the more efficient assets  for the general populace to increase capital wealth and protect against inflation.  Many social economists and financial advisors have asked for governments to help citizens set aside investment accounts just for investing, not for subsidizing housing, education or health, to achieve the dual purposes of inflation hedge and committed wealth creation.

How can the ordinary investor make the game more palatable?   As always, there is a simple answer.


Follow up article.

Change A Rule (Part 2).

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R:R Ratio – The Unintended Red Herring

post on March 2nd, 2017
Posted in Trading

The Reward Risk (R:R) ratio helps a trader manage his trade –  not provide a valuation of risk.  R:R does not measure risk.  Some strategies with “inferior” R:Rs are in fact safer (less risky) than some with  higher R:Rs.

A highly positive R:R ratio falsely assures many traders a risk is worth taking.  If someone passing by my house tells me there is a large, hopeful gold vein in my backyard and shows me geo-studies attesting the same, should I invest a handsome amount towards mining it?  The R:R ratio can grow higher as gold prices climb, but that does not in any way change the risk of my mining efforts returning nothing.

Recently someone signaled a buy trade to me with a 1.5 R:R ratio.  Having only a 20 pip stop, her call was subject to short term volatility of the traded pair.  With a rational edge (Strategy: London open plus confluences breakout), she was confidently calm and collected.  Whether she lost or gained that day was immaterial.  She was undaunted.  Mathematically, she would still be ahead even if she lost more times than when she profited.  By smartly managing her position sizes, she supposedly stood a good chance of winning over the longer term. Where was the risk?  If she had a wanton run of bad luck?  That would hardly be the case – since most traders are self deluding to some extent – we just don’t believe bad luck can consume us.  I would have applauded her but for….

My quibble was not her sanguinity with losses and wins, nor her tight money management wisdom.  Rather I chided her for not taking an opportunity only when conditions were most favorable.  Her trading position was not initiated until several hours after her call.   Her edge had already diminished significantly by then.  Naturally her premeditated stop loss  became too tight as the trade progressed into a more ruthless, volatile Europe / US crossover time zone.

But she staunchly waited for her 1.5 times target.   In that latter session,  there were  additional risk events (two important scheduled announcements) that could have easily swung her out.  Could she have closed her position rather than wait for the 1.5 R:R target?   Rephrasing this – if the  major, volatility inducing announcements were scheduled earlier around the London open instead, would she still have stuck with a 20 pip stop strategy?  If she would not then, why would she still risk an “outdated” strategy in the harshly volatile US/Europe crossover?  I asked her, and she justified she had an advantageous R:R target.   Even if the R:R was raised  4 times, her initial strategy was already obsolete for the change in risk.  Any lucrative R:R could not justify a wrong strategy that did not match the risks involved.

With an attractive R:R ratio, many traders can answer “Is this a favorable trade?” but forget to ask “Is this a high probability trade?”.

There is no recommended range for R:R ratio. Some strategies are only successful with low R:R targets.  Others may only be tenable with lofty R:R ratios.  R:R ratio is just one of many very important contributors to risk management.  But more often than not, it becomes an excuse for impulsivity, hope and greed.

PS:  Thankfully she did hit her R:R target later.  I on the other hand, saw the opportunistic  clues provided by her failed strategy near the London open, plastered with other market developments, took the cue to short sell another pair.  My R:R ratio was 1:1, but I got my 20 pips profits within 30 minutes with an efficient edge and a lot less risks.





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What Do You Really Do?

post on October 31st, 2016
Posted in Trading

Yesterday I was trying to explain to my young son what I actually do everyday. ……

“So you must guess the price direction?”

“Yeah, in a way, I try to guess intelligently of course.”

“You must be really smart.”

“Yeah, but smart has nothing to do with making money (in the markets).”

“So you must be really lucky.”

“That I don’t know, sometimes good things happen, but I be crazy to depend on luck, and you shouldn’t too.”

“Do you have to work real hard?”

“Sometimes – it all depends on how easy the opportunities come (to make money).”

“So you sit and wait?”

“First, I actively scout around for opportunities to see if they are there, hiding somewhere, but if I don’t see them, I just wait – sometimes a long time.”

“Is it fun? But honestly sounds boring.”

“On some days – interesting, other days – dead boring – for my style of trading anyway.”

“Is it difficult to learn what you are doing?”

“Yes it is difficult – but only in the beginning. I trade in two main ways – with an advantage (an edge) that I have spotted, and with an edge that did not quite crystalize as I hoped. We call the advantage an edge. You can learn both ways.”

“Huh? So you win money with an edge, and you lose money without an edge?”

“Truth be told, sometimes yes, sometimes no. There is no guarantee an edge will help you be profitable, but it does increase the likelihood. Sometimes the edge you believe is there has disappeared, but you can still make money if price somehow moves in your preferred direction – for whatever reasons we may not know till much later.”

“Sounds very much like Chance.”

“Not at all really. In fact chance is purposely (deliberately) minimized but unpredictability is left alone.”

“Okay, what kind of logic is that?”

“A logic you don’t learn in school huh? Let’s use an example, you spot a few opportunities, and after analyzing them, you pick the one that has the most chance of making money – or you reduce the chance of making a mistake. But there are many unexpected events that may happen in this world, and so affect the trading markets – and hence affect your choice.

Assuming you think Starbucks is great, you study everything about Starbucks, and you buy Starbucks shares thinking it will be even greater. Then terrorists attack Starbucks in Australia, in Indonesia – all unexpected and unpredictable events to you.  Now let’s say consumers start avoiding  hotspots like Starbucks.  What do you think will happen to Starbuck’s share price? You analyzed the Starbucks opportunity to minimize the chance of making a wrong investment, but you cannot take away the risks that unpredicted events may happen.

Sometimes these unpredictable events destroy your original game plan, sometimes they help you make more money (Example – if new research shows drinking coffee will boost children’s IQ). Can you stop or start these unpredictable events? No – we just have to accept they happen.”

“So we just work on what we can manage – our judgment, and leave the market to do what it wants to do.”

“Though we cannot predict or stop unexpected events, we can minimize the damage such events can do to us – if we expect such events to prevail, we enact a process called “reducing losses”. Alternately, we can also maximize gains from such events if they are in our favor. So we cannot manage these unpredicted events, but we can manage the impact these unpredicted events levy on us.

…..  you are yawning so much , better  get to bed.”

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Stop Staring At The Screen

An old friend  shared how discouraged he was with not being able to manage his impulsive trades. That evening we decided to observe how he traded the US  session.

He certainly was hard working and eyeballed every 5 minute bar.  He had a reasonable trading strategy, but on several occasions strayed from the original plan, and “analyzed” various opportunities on the fly.  Quite a few times, I had to stop him from committing to a trade regardless if it eventually won or lost.

My friend was too eager to make money. (In his case, to make up for  previous lost investments.)

Based on his trading methodology, I explained how he could use a simple filter, as well as an alarm alert.  After he prepared a simple trade management plan and set the alerts, I told him to just leave his laptop. If he wanted he could watch TV, read a book, or even review market updates from Bloomberg, Forexlive etc – just not watch the currency rates or the charts.

He need not be dismayed – many traders were like him. These traders who stared painfully  at every movement, hoping to catch an elusive winner, ultimately put on impulsive trades. No amount of self restraint would have helped.  For my friend, it was better to have a strategy that would not require watching the market so intently.

By using a filter, we let the market scream out to him when his edge was in play. Once the alert had been activated, he could review how feasible the edge was in the current market condition – and if he decided to take the play – to monitor the market for a potential entry or set a limit order.

If successfully executed, he needed to set the necessary stop and take profit alerts, be watchful over when the next major event or announcement would be made, and just leave his laptop.

Simply not being glued to the screen  is itself  a major step to avoid impulsive trades.

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The Most Consistently Profitable Trader Is Also The Best Loser

I saw this on a T Shirt recently –  “Second place is the biggest loser”. Most of us are indoctrinated against losing. We sing praises of those who overcome impossible odds, we hail the champions, and we immortalize heroes. In schools, at work, we battle to win, we do not learn to lose.   Resilience is that resonant voice that picks up our spirits, and girds us in the face of adversity.   But to do well in an activity, where losing is a common occurrence that afflicts performance, we must learn to lose well. In the sport of Judo we first learn how to take a fall safely, in cycling we almost always fall off a bicycle before we successfully ride freely, and in boxing, we learn how to take punches correctly to survive long enough to fight back.


How often does a trader lose?

Analysts at Dailyfx.com, drawing from 43 million trades between Q2 2014 to Q1 2015, showed a large incidence of losing trades amongst Forex traders (between 40% to 50% of all trades). (Illustration below from www.dailyfx.com)

More Winnng Trades Than Losing Trades

No doubt, losing is common in trading. Thankfully there were more win trades than loss trades – in fact, anywhere from 50% to 61% (EUR/USD) were winners across the 15 most commonly traded pairs.


It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.” George Soros

Yet despite this optimistic observation, trading results showed traders lost more money than they gained ultimately.    The average number of pips lost for each losing trade well exceeded the number of pips gained for winners.   (Illustration below from www.dailyfx.com)

Average Losing Pips Exceed Average Winning Pips


Why were the loss pips so much higher than the winning pips? Prospect Theory on risk behavior from Daniel Kahneman (Nobel Laurette) offers an intriguing explanation.

According to the theory,  we hate to lose more than we like to win.  This means if we have a choice between a certain probability of losing a sum of money (for example, 10% chance of losing $800), against a definite loss of a certain amount (say $50), we tend to try to reduce our potential loss or  even strive to turn a profit – we will not take the definitive loss even if the potential loss may ultimately cost us more.  A short term trader hanging onto a losing trade which ultimately becomes an unplanned long term investment, and various martingale strategies typify such an attitude. When we hit a winner, we do not let the trade run its profitable course.  Rather than wait for a higher prospective profit (and risk potential loss or profit erosion), we willingly settle for a concrete smaller profit, and perhaps shortchange ourselves on the full potential of the trade. Taking profits too early and the commonly accepted adage “you never go broke taking a profit” mirror this mindset.

So we hate to lose, we lose miserably, and we win miserly. That about sums it up.

Unless you have a superior edge like reliable insider knowledge or a magic crystal ball, losses in trading is inevitable. A consistently profitable trader must learn to roll with the punches on a regular basis like a boxer.   Only when we embrace this mindset, do we see the light for more rewarding trades.


Is 1 : 1 reward risk ratio enough?

When pursuing a proven strategy, we should not lose more than what is expected if the market turns against us – the best loser respects stops and entry limits.  To win masterfully, we need to let profits run. We can augment this by taking trades with reward risk ratio of at least 1:1 or better.  Dailyfx’s analysis of sample data concluded that 53% of the accounts operating on 1:1 ratio were profitable for a 12 month period, whilst only 17% operating on less than 1:1 reward risk ratio were profitable for the same period. This means a trader with at least 1:1 reward risk ratio is nearly 3 times more likely to be profitable than one who does not.   (Illustration below from www.dailyfx.com)

Equal reward risk ratio raises potential of profitable trade


Simple empirically driven principles …. with a caveat

So we can summarize, a consistently profitable trader accepts regular losses, uses correct strategies with at least 1:1 reward risk ratio, respects stops and entry limits, and lets profits run.  Doing these,  he minimizes his losses and creates opportunities for more winning pips.

The caveat – not every trading opportunity permits use of these suggestions. As a trader, you have to filter through conditions, and identify strategies and market circumstances that allow  exploitation of these recommendations and know when they are inappropriate.  If for example, your trading strategy is based on 5 min charts with momentum bursts, letting profits run in a volatile environment may result in fatal whipsaw stop-outs instead. If your strategy is powered by a stressor edge (example – war claims leading to demand for safe haven currencies), which over time have diminished in severity, it then becomes unwise to wait for a predetermined reward risk target  to be reached.  If you deploy high reward risk ratio strategies in short term volatile environments, you may  have to contravene common consensus with a suitable position sizing plan that thrives on high frequency, repetitive opportunities and perhaps even amalgamate with an adjusted martingale formula.

So we cannot blindly impute any principle into a strategy without clearly understanding its potential limitation.  Such dogmatism is suicidal.  However, traders can choose to abandon strategies that do not sufficiently  accommodate the principles described in the findings.  That is perfectly alright.

It is important to understand, our job is not to trade every opportunity or strategy. A trader’s mission is to trade only the highest probability opportunity or strategy and to win and lose consistently well in order to stay profitable.

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Less Risks, More Profits? Love Stress!

post on October 13th, 2015
Posted in Trading Tags: , , , , , , , , ,
    Nervy Third Quarter

The last quarter (June – Sep 2015) was a tragic tale with many acts. Some US$11 trillion was wiped out as stock markets were brutalized across Asia, Europe and US. Commodities accentuated their downward spirals, and funds continued their flight from emerging promised lands, (nearly US$1 trillion drained away over 13 months till July, much of it from China). For many days, depressive equities regulated the pulse of different markets, and there was even a brief period when desperate hands enthroned Euro as a pseudo safe haven currency. In Asia, we watched how the credit sound Singapore dollar was trampled when naysayers connected dots between China and Malaysia as Singapore’s top two trade partners. Later we witnessed the mighty US dollar being resuscitated in its invincibility. We saw how hopes recovered when China injected stimulus funds into the stock markets, and growing relief that a low Fed rate regime would likely pervade in the immediate future. Even when most equities started languishing in ranges, plummeting oil price drew an unwavering trend line as supply continued to flood the market despite expected decrease in seasonal refinery demand. Then of course, Glencore and Volkswagen provided the final act for the curtain call to end the quarter. Indeed through the many rampages, experts and soothsayers from economists, politicians, analysts, to business leaders and traders were finally singing the same chorus – we were in total crap.

    Stress Creates Advantageous Opportunities

So what did the astute, mercurial trader do? He embraced stress. In one of the most noteworthy third quarters, the world was launched in a clear trajectory on many fronts, and the stress driven events which evolved created many risk efficient, profitable trading opportunities.

An example was when China devalued the yuan on Aug 11, and stunned markets all around. The ensuing mania spurred a massive exodus from Asian currencies to the relative safety of European dominions. As events unfolded over the next few days, the Euro’s fairy tale “stability” (in recognition of ECB’s consistency) propelled the Euro upwards. During that week, nimble traders longed the Euro and Sterling but shorted China related currencies such as the Singapore Dollar, and the equity markets, particularly the unfortunate Hang Seng Index. Following that short episode, markets were still vexed by uncertainties, and the probability of a US rate hike diminished markedly. Given that environment, the Euro naturally climbed as risk averse investors continue to unwind the Euro carry and reduced short Euro hedges. Again it seemed so natural to long the Euro during that anxious period of low rate expectations and un-acquitted challenges.

What we saw was stress from significant events drove different markets in apparent pathways. Market players who were previously pursuing different agendas became united in one purpose as they bolted for the same exits with largely the same intent. These created clear sustained momentum in obvious directions. For a trader, this was a godsend – direction bias and strength permitted smaller stops and faster profit goals. Less risks, more profits. Hence anxiety over existing portfolios need not eclipse the lucrative opportunities stressed markets present, instead the trader should take prompt actions to exploit them.

More recently, the September quarterly close was itself a prominent event. September was the month liquidity was to return en massed after the summer siesta. In a way, it was convenient that Glencore and Volkswagen drove the US and European markets southwards. The downward trepidation in the last weeks was a necessary prelude to the spike up heralding September’s window dressing close. For this year at least, the markets rewarded such an attentive trader.

Next Quarter – Dining On A Buffet Of Opportunities

So what happens next? After the dust has settled, investors and traders will question what has really changed. Will volatility decrease? Has economic progress turned backwards? Do we have an inverted yield curve? Have the confusions that punctuated last quarter drawn any meaningful road map for the next? Are central banks any clearer than they were? Rather than be stressed over contentious answers – perhaps it is more rewarding to focus on what is going to be served in the most tantalizing quarter of the year.

The final quarter is usually the last opportunity for businesses to energize their earnings for the financial year. It is buffered with high liquidity, and potentially profitable opportunities such as October book closure for a large number of mutual funds, the earnings reporting season, change in seasonal demand for commodities such as oil, quadruple witching expiration, year-end window dressing and pressing deadlines for key decisions like the elusive Fed rate hike.

Not on the calendar are unexpected events that will again throw momentum in biased aims. Startling economic health revelations, and unanticipated statements by leading figures can provoke searing market responses. Speculation is rife that Japan and ECB may introduce more easing measures this quarter, whilst strategic maneuvers in the Middle East may whip up oil prices. In fact any high tension political drama can sound risk off alarms world-wide.

Of course, we also sleep under an ever descending ceiling of daggers – with receding liquidity in the bond market as financial institutions reduced fixed income inventories, and with much irony, living in the most debt burdened world since time immemorial. Combined public and private debt is now 265 percent of GDP in developed countries (a jump of 36 percent since 2007), and 167 percent of GDP for emerging economies (China alone owes 235 percent of GDP). Offshore US denominated debt has reached $9.6 trillion, and approximately 80 percent of the dollar debt in China are of short term nature. Can you imagine what will happen if the Fed really raises the rate this quarter?

The last quarter promises action galore and stress driven opportunities. A clear mind and a well-organized roadmap of information will help the nimble trader find trades with the best risk reward advantage. Will you be stressed or be ready for desserts? (OK a bit corny but I can’t think of anything better for now.)

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Edge, Not Direction Is The Basis For Strategy

post on September 29th, 2015
Posted in Trading Tags: , , , , , , , , , ,

Oft times I am asked where a particular currency is headed. My usual answer – I am a short term trader and have little grasp on forecasting currency direction. Some are smarter and ask whether they should buy or sell a particular currency. My reply – both are acceptable, insofar as they have identified a buy edge or sell edge before jumping in.

Which brings me to the point – a trader does not trade direction, he trades the edge.

This is not to discount direction, but with crystal clear thinking, direction is just the result of an edge in action. (What about momentum? Momentum is a bit more complicated, and can be used as an edge or be a mere spectator by-produce. But more of that next time.) So a trader can buy the US Dollar or sell the US Dollar, it does not matter if he has identified a worthy edge when he buys or shorts the currency.

Normally when I develop a strategy, I identify the possible edges, and then construct the most proficient set ups I can to take advantage of those edges. Conversely, if a set up appears, I want to know if the edges are in high probability play. Some traders advise when a set up appears, one must take the trade regardless how he feels – since emotions can convolute judgement. By all means, if that works for you, go ahead. That edge may lie in success based back testing, position sizing, continuous trend run and so forth. Truly, there are many ways to successfully skin a cat. Knowing how unpredictable the market can be, I be a fool to claim otherwise, and am merely sharing what I know works for me. But whatever method a trader employs, he must always be able to see the edge in what he does.

This passage may appear fuzzy and incongruent to some. It is not by deliberate effort or accidental thinking that I wrote in such manner. Either the reader understands or does not. If he does not, then he requires more screen time and reflection – truly that is the secret of seeing where the edge lies.

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