An interesting New York Times article released a few years ago describing the Japanese housewives who moonlight as currency traders. ¬†Back a few years ago when the carry trade was in full swing there were many people in Japan and other countries playing the carry trade and making some decent money at it. ¬†They were playing the up trends in the yen crosses and pocketing the nice interest rate differential. ¬†Nothing wrong with milking the trends for all they are worth.
Let me analyze the article for you and provide the nuggets of value.
It seems there were a lot of retail currency traders in Japan who lost a lot of money in the market “turmoil” of August 2007. ¬†One of them lost their family’s $100,000 in savings the article states. ¬†How do you lose 100% of your account? ¬†Well, either you were leveraged too much, did not use stop losses, or your stop losses got slipped badly, and stuck on the wrong side of the market, or some combination of all of the above. ¬†If you don’t have the order flow and liquidity on your side, and you lever up, then you are setting yourself up for big losses. ¬†At least you if you decide to leverage up, make sure you do the work necessary to have the massive market momentum on your side from the moment your trade is placed.
Also in times of market turmoil, there is plenty of market opportunity. ¬†If you were stuck long the yen crosses during August 2007, then you suffered some losses. ¬†But some people take it step further and start crying about it, claiming the ‘unforseen’ volatility wiped out their accounts and wonder how to profit from it. ¬†There were plenty of people who made out like bandits during August 2007 by shorting the yen crosses and capturing the explosion of volatility. ¬†Remember you can always go long and short as Ray Dalio mentioned.
You need to stop crying about it, and FOCUS on how you could of¬†foreseen¬†the volatility, on how you could of sensed the shift in sentiment, the shift in fundamental value. ¬†That is where the money is. ¬†But if you are crying about it and suffering from information overload, then you don’t stand a good chance. ¬†You need to embrace the information.
You didn’t even need to catch the volatility by going short. ¬†If you could of sensed that long the yen crosses during that time entailed above average risked, you could of stayed flat and just waited, saving your cash to be deployed at another date in the future.
The article then talks about the market participants that will be shaken out, caused by the credit and stock markets collapsing. ¬†No reason to get shaken out if you are on the right side of the order flow and liquidity. ¬†But if you are oblivious to order flow trading, then yeah you might get shaken out.
Then the article states: “While day trading of stocks has also taken off in Japan, the women say they prefer currencies because of the relative simplicity: currencies might involve only a handful of nations, while trading stocks might mean keeping an eye on hundreds of companies.”
They are right. ¬†It is a lot easier keeping track of a just a few countries rather than having to do the research for hundreds of stocks.
It seems many of the Japanese traders who lost a bunch of money did not follow their stop loss rules: ¬†“Ms. Itoh recalled that she had wanted to cry as she watched the yen jump as much as 5 percent in value in a single day, Aug. 16. ¬†She did not sell her position, thinking the yen would fall again. But by the next morning, only $1,000 remained in her account, she said.”
It seems that the trader just waited and waited for a margin call to wipe out the account.
FOCUS on how you could of¬†foreseen¬†the volatility, on how you could of sensed the shift in sentiment, the shift in fundamental value. ¬†That is where the money is.