In Cambio Veritas

[Monetæ]

INTRODUCTION:

I previously worked for 3 years a trader on a currency desk at a mid-sized hedge fund. Since the web is inundated with misinformation regarding currency trading in particular I figured it sensible to provide an institutional perspective on currency trading, discussing the major differences between retail and institutional investors. Why is it that most retail traders lose money? They are almost defined by this very fact. Conversely Bloomberg features articles like "Goldman Lost Money on Two Trading Days in First Quarter... made over $100 million on 46 days in 2nd quarter."

Additionally, instead of solely discussing how a retail investor can trade on an institutional level I am going to fund an account to back my approach. I will fund it with 10,000 USD (a figure reasonable for any retail trader).

The major key differences are as follows:

• FUNDAMENTAL RESEARCH (A clear understanding of why you're trading)
• Timeframe
• Money Management
• Leverage

I will discuss these in more detail later.
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APPROACH:

I primarily stick to G7 currency pairs.

I use fundamental analysis to gain an overall perspective of the markets, focusing primarily on interest rate differentials.

I use technical analysis (support & resistance/ trend lines) to identify key areas of confluence for entry/ exit.

I target medium to large swing trades 250 to 500+ pips with a minimum risk reward ratio of 2:1.

I prefer 4H and 1D chart. I may use 1h to target entry & exit.

My initial entry size is 20% of my maximum position size. I increase the size of positive trades and let my negative trades stop out.

I will update performance monthly.
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NOTES:

I use Ransquawk, IFR Markets, UBS FX Research, Bloomberg,

Also check out: nobrainertrades.com, Market Wizards, & The New Market Wizards by Jack D. Schwager if you haven't already.

***This thread is for informational/ educational purposes only. None of the following is meant to be a buy/ sell recommendation.

More to follow soon...

 

[Martinghoul]

When you were at that HF, were you running your own bit of risk or was it a different capacity (e.g. execution trader, analyst, etc)? Just curious, is all. Def looking fwd to your trades.

 

[Monetæ]

Originally I started in an Analyst capacity. When a spot on the desk opened up (one of the traders left to start his own fund) I was able to take his place.

 

[Monetæ]

Fundamental Outlook:

USD / JPY

- Fed Chairman Bernanke's announced the central bank may begin to reduce the size of asset purchases later this year.
- Although we may be far off from tightening the market perception is that QE is finally coming to an end.
- All markets declined, 10yr yields & USD surged.
- In one direction the end of QE and eventual tightening mean higher rates. Conversely the BOJ has maintained its commitment to easing. Thus usd/jpy should end the year broadly higher. 105-110 is likely.

Long term I expect we will see an even larger shift given the state of Japan's economy. I wouldn't be surprised to see Japan had a full blown currency crisis in the next 2-3 years.

[In my other account I am already long usd/jpy from 95.44 & 96.20. If we break this downward TL I expect we will see 99.90 rather quickly. From there I anticipate a decent bounce so I will take a bit off and add to my position if it breaks above.]

Research:

https://fxtrade.oanda.com/analysis/news/ubs/3003975/

https://fxtrade.oanda.com/analysis/news/ubs/2998303/


Last week the AUD/USD broke a key support level plummeting almost 5 figures in a week due largely in part to a lower than forecasted Chinese Manufacturing PMI. With the risk of slower growth in China combined with an 18 month decline in rates the same inverse fundamentals apply.

AUD / USD
There is now scope for 87.50. I may get short on a pullback if possible, but I prefer CAD from a risk management perspective since I am already long USD elsewhere.

AUD / CAD

I really like the current weekly chart because it is so clean. S&R levels are unmistakable. I will look to get short on market open Sunday with a stop above 98.20

 

[Martinghoul]

Yep, I have both of these on, actually, but I really like the spicy EM variants. For instance, I got MXNJPY instead of USDJPY, and AUDINR instead of AUDUSD. Worked well, until it didn't recently... Still, as a carry munky, I just can't resist.

 

[Monetæ]

One question... Why?

Those aren't variants. Those are different positions altogether. There is a huge difference between being long mxn/jpy compared to usd/jpy and short aud/inr vs. aud/usd.

Rising US yields means an influx of capital, from currencies with declining rates and emerging markets in particular.

Goldman Says Real, Lira, Rand Must Weaken to Close Trade Deficit - Bloomberg

 

[Martinghoul]

One question... Why?

Those aren't variants. Those are different positions altogether. There is a huge difference between being long mxn/jpy compared to usd/jpy and short aud/inr vs. aud/usd.

Rising US yields means an influx of capital, from currencies with declining rates and emerging markets in particular.

Goldman Says Real, Lira, Rand Must Weaken to Close Trade Deficit - Bloomberg

Carry is one of the reasons why. The other reason is that I am, generally, positive on Mexico (benefits from the re-shoring trend; China's loss is Mexico's gain). The choice of INR is motivated by my expectation that India will benefit from lower commodity prices (e.g. gold and oil). Finally, I should mention that these trades were done before the recent Fed-inspired EM-a-geddon and were supposed to express the weakness of AUD and JPY, rather than the strength of USD.

 

[timsk]

I previously worked for 3 years a trader on a currency desk at a mid-sized hedge fund . . .

. . . I use technical analysis (support & resistance/ trend lines) to identify key areas of confluence for entry/ exit.
...

Hi Monetæ,
Welcome to T2W.
It's always good to have traders with institutional experience contributing - so I look forward to your thread.

One question I expect a lot of subscribers will be wondering is the extent to which you and your colleagues relied upon TA in your hedge fund days. You include it as part of your approach now - but was it also part of your approach back then? If it was used, did you just use price action or did you utilize any technical indicators?
Cheers,
Tim.

 

[pboyles]

Davie Robertson?

 

[rsh01]

Fundamental Outlook:

- Although we may be far off from tightening the market perception is that QE is finally coming to an end.

really?

so where have the 'market' got this view from? tapering is the reduction in fed monthly asset purchases - the balance sheet will still grow, & the fed have only indicated that this will happen when unemployment is below 6.5%. the real rate of unemployment is increasing.......& the fed have said nothing about ending QE, and thats ignoring the well known fact (which one can assume the market is aware of) that they will not be able to end QE (or risk causing a massive mkt correction), its arguable that they can even reduce the rate of monetisation as it is this flow (mainly) which is keeping the asset prices inflated.

i am with pb here, this smells of mr spreadbetting.

 

[Monetæ]

Just got to my desk.

I mentioned I was going to short AUD/CAD. Holding off for now as I think AUD may get see a small rebound. AUD/JPY is at key support.

 

[Monetæ]

Buy USD/JPY @ 97.83, SL 97.57, TP 99.74

 

[Monetæ]

Stopped out but re-entered Buy 97.58, SL 96.75, TP 99.75

 

[Martinghoul]

Hmmmm, this is all very very strange... Your stop on USDJPY is 30 ticks? And you stop out, only to get back in a tick worse? How bizarre!

 

[Monetæ]

Why do you find that strange?

Stop was too close to mkt. Dudley drove usd down. Fundamental view is up. But yes re-entered 1 pip worse.

 

[ffsear]

Good thread! Please keep it up!

 

[Martinghoul]

Why do you find that strange?

Stop was too close to mkt. Dudley drove usd down. Fundamental view is up. But yes re-entered 1 pip worse.

Just really a v v tight stop, given how much you're intending to make on the trade... You're expecting to be able to obtain a 14:1 option-like payout w/o the options. Not impossible, but to do magical trades like this in a systematic fashion is gonna be tricky, to put it mildly. As to your stop and then re-entry, it just seems a little unusual.

Still, it's totally your prerogative to do things the way you see fit... Pls feel free to disregard my idle musings.

 

[Monetæ]

Agreed. Consistent ratios like that would be difficult.

No worries. Just keeping me honest.

 

[Monetæ]

Out @ cost. WIll re-buy @96.95.

 

[The Leopard]

Davie Robertson?

Who knows? I suspect time will tell, it usually does.