my journal

[Weighbridge]

Ok, thanks for explaining again, we agree on quite a lot now.

if you're looking for situations where the EUR has sold off against both the GBP and the USD, then yes you'll need to consider all three currencies.

To do that, yes you'd need to look at two currency pairs. They can be any two pairs in the EUR-USD-GBP triangle, it doesn't matter which. Once you know two of them then you can infer the third one.

When you actually place a trade you can reduce your costs by choosing the right pair from the triangle - because you'll be placing one trade instead of two.

What I now think you're proposing is that when the EUR (or whatever) sells off against a whole basket of other currencies, then it is likely to revert. I don't know if that's true or not. Often a currency will just get weaker and weaker due to interest rate differentials, state of the economy etc.

I think that looking at two pairs from a triangle can definitely help us understand what HAS happened (e.g. people have dumped the dollar), but I'm not convinced it has any extra predictive value.

But the only way to find out would be to test it, and it's up to you whether the idea interests you enough.

 

[Yamato]

Yes, I am glad we agree on almost everything now, but what about that extra ingredient? What about going LONG on the oversold future, while going SHORT on the overbought one?

I am not sure this ingredient makes the system more profitable, I am not sure, but for this reason I cannot rule it out. To simplify it further: say the EURO is weak towards the dollar and the Pound is strong towards the dollar. Does it make sense to go LONG on the EUR and SHORT on the GBP, betting on a realignment (to be happening sooner or later, if not by the end of the day, at least in the overnight session)?

Without a logical "step by step" train of thought, but by instinct, I would sense it's profitable, but things in this field may deceive you, so your opinion will be useful.

Put it like this: what if I can prove to you, and first of all to myself, that despite failing for 12 years as a discretionary trader, I can actually find a way to make money by discretionary trading this method? Then, no matter how illogical it may be, the method will deserve some consideration. And I have a feeling this is the case. It might even be just psychologically useful.

Psychological hypothesis
Say the EUR and GBP are far apart, and I open reverse positions as planned. Say there's no realignment, and the two keep on moving together without any changes in speed or direction. That's like having no positions open, even though I do have positions open. Say the EUR keeps on falling and so does the GBP. I will keep on making money with one while losing it on the other, thereby breaking even.

Then all of a sudden we hit bottom really hard, and I am still breaking even. Then I decide to close the short position on the GBP, and only keep the EUR long position. I will start making big money, without having lost anything up to that moment.

How is this useful to me psychologically? Like a placebo effect. I will not feel the pressure to decide when to open a trade with the fear of anticipating the bottom, and I will just have to close one existing position when it's evident that bottom has been reached. Until then I'll have my trades open but will lose nothing.

This seems a waste of money in commissions but it's very powerful for people like me who have a tendency to overtrade and anticipate reversals. This alone would make the method worth trading.

Then, and that was my real question to you, we still have to know if the method "long on one and short on the other, hoping for a realignment" makes sense other than psychologically. I think it does, especially at times of reversal, like at around 8 PM CET.

 

[Weighbridge]

Yes, I am glad we agree on almost everything now, but what about that extra ingredient? Going LONG on the oversold future, while going SHORT on the overbought one? To simplify it further: say the EURO is weak towards the dollar and the Pound is strong towards the dollar. Does it make sense to go LONG on the EUR and short on the GBP, betting on a realignment (to be happening sooner or later, if not by the end of the day, at least in overnight session).

If EUR/USD has fallen and GBP/USD has appreciated then it tells you (very crudely) that:

The EUR's value has fallen overall in the world
The GBP value has increased overall in the world
The USD is worth about the same overall in the world

The situation might reverse or it might continue. I wouldn't want to call which.

If you think the situation will reverse then you could go long EUR/USD and short GBP/USD. If you do that in the right proportions then the two USDs in the equation would cancel out and leave you with a synthetic EUR/GBP position.

The cheaper way to do it would be just to go long EUR/GBP.

It's hard to read algebra in a forum post but here goes:

EUR/USD * USD/GBP = EUR/GBP

 

[Weighbridge]

Then, and that was my real question to you, we still have to know if the method "long on one and short on the other, hoping for a realignment" makes sense other than psychologically. I think it does, especially at times of reversal, like at around 8 PM CET.

It's easy to test really. If EUR and GBP have a tendancy to realign themselves to each other whenever they separate, then the chart for EUR/GBP will be profoundly rangebound.

When I look at the EUR/GBP chart I see that sometimes it's rangebound and sometimes it's trending. If you can predict when it will be rangebound then you can clean up by trading EUR/GBP.

 

[Yamato]

If EUR/USD has fallen and GBP/USD has appreciated then it tells you (very crudely) that:

The EUR's value has fallen overall in the world
The GBP value has increased overall in the world
The USD is worth about the same overall in the world

The situation might reverse or it might continue. I wouldn't want to call which.

If you think the situation will reverse then you could go long EUR/USD and short GBP/USD. If you do that in the right proportions then the two USDs in the equation would cancel out and leave you with a synthetic EUR/GBP position.

The cheaper way to do it would be just to go long EUR/GBP.

It's hard to read algebra in a forum post but here goes:

EUR/USD * USD/GBP = EUR/GBP

You seem quite intelligent to me and even though I don't understand everything you say I am almost drawing the conclusion that all the advantages I see in opening such "statistical arbitrage" positions are just deceptions of my own mind. I think this is the first time in the financial arena that this happens to me, and this area might particularly deceptive. Also because I am not good at algebra and the kind of reasoning you've been doing.

I am going to try it for a few more days with my discretionary trading, and if it makes money, I will assume that I finally found a method that helps me psychologically. Your math and reasoning is beyond my understanding. I thought I had seen something profitable and that made sense but I am close to concluding that it may only be a psychological thing (that might be profitable nonetheless). That formula is Japanese to me. I don't understand it. Besides why is the... well I see maybe... well, I trust you that it makes sense. And if it does, then I am just deceiving myself. Oh, by the way, the EUR/GBP future has no volumes at all, does it? If that's the case, it would still make sense to test and trade everything on the EUR and GBP futures.

 

[Weighbridge]

To put it another way, you can think of the EUR/GBP chart as a graph that shows the relationship between the EUR/USD future and the GBP/USD future.

When the graph is horizontal, those two futures are moving in step with each other. When it moves up or down, their relationship is changing. Sometimes it will change back, sometimes it won't.

 

[Yamato]

It's easy to test really. If EUR and GBP have a tendancy to realign themselves to each other whenever they separate, then the chart for EUR/GBP will be profoundly rangebound.

When I look at the EUR/GBP chart I see that sometimes it's rangebound and sometimes it's trending. If you can predict when it will be rangebound then you can clean up by trading EUR/GBP.

Ok, finally a part that I understand. However, we must also add 1) timeframe and 2) time of the day.

That's very important.

Say the EUR and GBP are like dad and son. If dad walks faster and distances son, son catches up during the early hours of the day. If dad does the same later during the day, then son might not catch up and will fall behind.

As long as my trading takes place in the hours when catching up takes place, then I should be ok.

Ok, so we've established some things but some I still don't grasp.

Do you still maintain that measuring euro and pound against the dollar is just as useful as measuring the euro and pound against one another, and therefore the dollar is totally useless in my trading and testing?

OK. By the last post you wrote, which I just read, after writing my entire post, I would say the answer is: YES.


CONCLUSIONS on ABORTED "statistical arbitrage EUR & GBP system"
Your examples (charts), your equation, your post yesterday... everything makes me understand and repeats to me this point: the dollar is useless, both for trading and testing.

And yet.. wow, that concept of mine, that idea for a new trading method was SO deceptive... I am still reckoning with it. Ok, thanks for having been so patient: your point is getting through to me.

I won't bother to look into trading the EUR/GBP directly because I have a feeling (the future) is not liquid enough.

I may still place a trade or two with the method "long EUR short GBP" just to see how much I can benefit psychologically from it, and if I do at all. That's all. No testing planned anymore. Your objections were quite valid. A week ago, you taught me that the drawdown formula was possible, and now you taught me that my system was not possible.

 

[Weighbridge]

I am going to try it for a few more days with my discretionary trading, and if it makes money, I will assume that I finally found a method that helps me psychologically. Your math and reasoning is beyond my understanding. I thought I had seen something profitable and that made sense but I am close to concluding that it may only be a psychological thing (that might be profitable nonetheless). That formula is Japanese to me. I don't understand it. Besides why is the... well I see maybe... well, I trust you that it makes sense. And if it does, then I am just deceiving myself. Oh, by the way, the EUR/GBP future has no volumes at all, does it? If that's the case, it would still make sense to test and trade everything on the EUR and GBP futures.

Hey if it just works then all the arguments in the world won't matter. By your own rules you'll be paper trading this though, right?

I don't know what the volume/depth is like on the eur/gbp. I can spreadbet it with a 3 pip spread so I assumed it was ok. If it's untradable then it's untradable.

 

[Yamato]

Paper trading? I don't know what that is in practice. I recommend it to everyone, but I don't apply my advice to my own actions. Pretty bad, huh? I always thought I was good to go, and ready for profit, in all my 12 years of never-ending losses. And I think that even now. So I can't accept the idea of engaging in paper trading, which will deprive me of profits (in my own delusional mind).

Discretionary trading was abolished in my own trading for a month, and now I am back in business. But at least if I go LONG on EUR and SHORT on GBP, then I can avoid losing a lot of money. This one thing is good. I can do discretionary trading without losing money. This thing is what made that "statistical arbitrage" idea ("illusion" maybe) so appealing to me. At the end, I might never make any money with it, but it will save me from blowing out my account, which is equivalent to making a lot of money.

Needless to say, I am not yet fully convinced of everything you've explained to me, that is the USD being useless in the whole trading/testing of my idea. It makes sense, but it doesn't feel right. But then I sucked at math, so I am used to many things not making sense to me.

 

[Weighbridge]

Do you still maintain that measuring euro and pound against the dollar is just as useful as measuring the euro and pound against one another, and therefore the dollar is totally useless in my trading and testing?

No, I've never said that. If you consider the EUR, USD and GBP then that will always give you more information than just considering two of them.

What I've been saying is that trying to pairs trade the EUR/USD and GBP/USD is just like trading the EUR/GBP.

As I see it you've really alluded to two different ideas and they've gotten a bit mixed up in our discussions. One idea is to pairs trade the EUR/USD and GBP/USD in the belief that they will mean-revert. You can see how that one works by looking at a EUR/GBP chart.

The other idea is to watch how the EUR USD and GBP all move against each other, and when one of them is weak against both of the others then you bet that it will reverse. I've no idea if this one would work or not.

I might have mangled your ideas a bit while trying to distill them down into one sentence - sorry!

I'm going to slow down my pace of posting a bit, as new posts are crossing with edits.

 

[Yamato]

Well, look, if your objections have made me lose balance in my reasoning and trip, it only means that my reasoning wasn't good at all. Look at the drawdown formula: I thought it wasn't possible, you told me it was. We talked about it for a few hours, and then I came up (we both did, but I used mine) with a formula that will save me hours of work every week (plus eliminate the possibility of error). You're just way ahead of me in math and reasoning in general, like most other programmers and similar. I wish I could just quit my job and go to school all over again, just as far as math and finally get rid of all doubts and problems I have in my mind. I believe that if I do that, I can actually become more logical and intelligent.

Strict teachers in school, by telling you you're bad, will inhibit your thinking/confidence. If you're compared with 30 more students and you're told "these 3 guys are good at math, and you suck", you're going to just give up all your reasoning capablities ahead of time. By ranking people, they encourage a majority to quit (all those who are not high-ranking). School kills resources and intelligence. Those teachers deserve to be slaughtered. I will go after them as soon as I gather enough money. But you are a good teacher, patient with the slow learners, so I won't slaughter you.

Probably too much work at the bank is further retarding me. I still do not fully grasp all implications of forex (change this currency into this other currency, and that other currency into that other one, then pretty soon my brain starts smoking).

 

[Yamato]

There's something still bugging me about that strategy, something good, that I am still unable to explain. My mind is more intelligent than my words. I may be even more intelligent than I think I am. That system must be tested. There's something about it that resists in my mind. I may be stupid but if I don't understand something I am confident and I stick with it. I am a confident stupid. I will test it after all, once I'll have a free weekend. I don't quit if I think there's something. After all, I am not tripping yet. I am going to go to the end with this idea. It doesn't matter if apparently it doesn't make sense. Don't worry about explaining things to me anymore: there's something good to this that I first have to understand and verify by backtesting and then I might be able to put it into words and stress it out properly.

 

[Weighbridge]

Hope you find something. Even if you don't it'll satisfy your curiosity.

 

[Yamato]

Thank you. I hope to come back here, in one month, and say: look, it works, I don't know why, but it works. Just like I did for the drawdown formula.

 

[Yamato]

Jérôme Kerviel
Nick Leeson
http://www.letmewatchthis.com/watch-2726-Rogue-Trader

Jerome, Nick, every time I trade discretionary I feel very close to how you felt in those infamous days (especially when Ewan looks is in the bathroom and looks in the mirror)... thank God my bank didn't let me be a trader as I asked more than once.

 

[Yamato]

But that's only at the end of the day. When I get started I feel closer to Freddy:

 

[Yamato]

She keeps Moet et Chandon
In her pretty cabinet
"Let them eat cake", she says
Just like Marie Antoinette
A built-in remedy
For Kruschev and Kennedy
At anytime an invitation
You can't decline

Caviar and cigarettes
Well versed in etiquette
Extraordinarily nice

Chorus:
She's a killer queen
Gunpowder and turpentine
Dynamite with a laser beam
Guaranteed to blow your mind (Anytime)

Recommended at the price
Insatiable an appetite
Wanna try?

To avoid complications
She never kept the same address
In conversation
She spoke just like a baroness
Met a man from China
Went down to Geisha Minor

Then again incidentally
If you're that way inclined

Perfume came naturally from Paris (naturally)
For cars she couldn't care less
Fastidious and precise

Chorus:
She's a killer queen
Gunpowder and turpentine
Dynamite with a laser beam
Guaranteed to blow your mind (Anytime)

Drop of a hat she's as willing as
Playful as a pussy cat
Then momentarily out of action
Temporarily out of gas
To absolutely drive you wild, wild...
She's all out to get you

Chorus:
She's a killer queen
Gunpowder and turpentine
Dynamite with a laser beam
Guaranteed to blow your mind (Anytime)

Recommended at the price
Insatiable an appetite
Wanna try?
You wanna try...

 

[Yamato]

 

[Yamato]

soymartino

 

[Lea Mille]

The broker role within emerging markets desk

Hello, guys,
Can you please advice what Emerging Markets Broker (fixed income) role involves (the daily routine, procedure)? What skills/knowledge I should concentrate on? Sorry for asking you this-just wanted know your opinion ( if you have emerging markets desk). Do you guys think that speaking a language ( emerging markets) a necessity?

Thank you in advance,
Lea