I have read from analysts that are calling for EUR/CHF to move substantially away from the 1.20 floor this year (1.27, 1.30., 1.42) . We’ll see…
I am looking at is as an opportunity to look at it (and trade it) like a hedge fund trader might do…that is, longer term. Like Soros isn’t looking to scalp 10 pips on EUR/CHF…he’s more thinking of entering and holding a position for a period of time (at least a few months or even years)…
So I am just considering it a position in my portfolio and to not stress out about every little 10 or 20 pips move…and just let it be for now and focus on other things (like doing the daily habits, finding other trade setups, etc.).
I can understand why some people are calling for the EUR/CHF to rise to 1.27, 1.30, 1.42 etc. Some people see the huge rise in EUR/JPY and start to think why not in EUR/CHF? In most cases, I try to avoid fanciful predictions. Just like there are some people calling for Gold to rise $2,000 an ounce, yet Gold just posted a ODVE and MDMM to the bearish side. I read other articles about the JPY where analysts and commentators said the USD/JPY could reach 200 or 300 or 400 or 500, etc.
There is nothing wrong with reading such articles from time to time that pique your interest and can help you form scenarios. But sometimes, the people that are talking about really big market moves are talking about fanciful scenarios that are several levels beyond the current market moment.
Sometimes the voice of greed is talking to you. For example there are some people who are long USD/JPY expecting it to go to 400.00. That is all nice and dandy but it is the voice of greed speaking. I don’t know how high it will go and I expect it to go higher, but I like to take it day by day, week by week. If USD/JPY is going to move to 400.00, then my research will pick up some of the ODVE, MDMM, and GM moves along the way and I will capture some of them.
That is why my preference is to have those potential scenarios on my scenario sheets, but then to acknowledge what the current market moment is. To acknowledge what is currently moving the market. What the market is currently sensitive to. Then to drill down to the 1-5 key elements and scenarios that can move the market.
In order for EUR/CHF to to move to 1.42, well something has to happen first for it to move to 1.27, then there has to be more macro to have it move to 1.30, etc, etc. In order for Gold to move to $2,000, then it first has to have a reason for it to trip stops above $1,700, then more reason for it to continue rising higher. Etc, etc.
This is where the concept of market sensitivity plays such a crucial role. I like to do my research to determine how sensitive the market is to the current information flow.
Gold was acting crappy from back in December 2012 from my sensitivity research. I didn’t see any reason to be long gold, let alone long gold in big position size. Some hedge funds figured that out as well and dumped a large part of their long gold positions as was reported over the past few week. But I believe John Paulson kept his long gold positions and now as Gold went down, I think he is suffering more paper losses of around $100 million.
Everyone just interprets things differently. Some people interpret the information flow and want to bail out of their positions. Other people interpret information and want to add to their positions. Other people keep the same positions on.
Market sensitivity matters.
For example, the EUR/CHF was not very sensitive to the good EUR data, so I tried to avoid that. The EUR/JPY was acting better, also because of the weak JPY across the board.
Therefore, every time I place a trade, I want to ask what scenario am I betting on? There are scenarios such as profit taking/long liquidation and short covering. Those do exist, but you want to be betting on a macro scenario and expectation repricing. Then, if I am trading a currency pair, I like to ask myself, which currency of the pair do I expect the move to be in? In other words, if I am going long EUR/CHF, I need to ask myself, am I anticipating EUR specific strength, CHF specific weakness, or a combination of both? That helps to figure out what scenario you are betting on.
Then once you figure out what scenario you want to bet on, you want to plug in the information flow to a mental macro/liquidity model to determine when to enter the market and time the trade properly.
For example, there are some uptrends that are going to continue, but if you buy on a break of the topside stops on fresh highs, it is a bad trade because the news/sentiment/fundamental/macro order flow is just not enough to push the market into a parabolic state. So in market conditions such as that, then buying an intraday dip, or tripping of light downside stops, you can be more profitable.
Every market condition and financial instrument can be different, depending on the market moment.
For example in some parabolic uptrends, then buying a break of the topside stops when it makes new highs is a very good idea, because the market stands a good chance to enter a parabolic state.
Other uptrends should only be played with buying a shallow intraday dip.
Other uptrends should only be played with buying a tripping of light downside stops.
Other uptrends should only be played with buying a tripping of key daily downside stops.
Other uptrends should only be played with buying a tripping of major downside stops below a very big level.
Vice versa for shorting opportunities.
Of course some situations, you don’t know what to do and stay out.
Also the market can shift into different state. One week you may be buying a tripping of key daily downside stops, but on another week a new scenario came into the picture and you want to start buying more aggressively on a shallow intraday dip or you may miss the move. The market can shift into different states.
How do you determine these different macro models / states? Well that is what the daily habits are supposed to help you do.
Position Sizing and Leverage
With regards to leverage and position sizing. The rule I developed is: the more leverage you use, the faster the market has to move in your favor and the faster you bail out of the trade.
As Victor Sperandeo said:
When you are trading at your biggest, you should be making money instantaneously
I learned this the hard way when I was in a highly leveraged trade, and the market moved 100 pips against me and I lost like 20-30% in a single trade. Even if you are up 100% or 200% prior to that trade, it sucks. That is when I developed a rule, that the more leverage you use, the faster the market has to move in your favor. So if someone is using 20:1 leverage on a single trade, then the market better move in your favor really fast, like within minutes or a few hours. You cannot handle bigger than a 30-40 pip stop loss. Even if you are using high leverage, you usually don’t want to suffer bigger than a 20-25% drawdown. I think I remember Paul Tudor Jones saying he lost 70% of his equity in a single bad cotton trade.
That is why if you are using high leverage, then you need to find a really good reason for the market to move fast, like some of the news catalysts and news trades. You want to have the overwhelming and immediate news/sentiment/fundamental/macro order flow on your side.
The less leverage you use, then you bigger fluctuations and mistakes you can handle.
For example, there were a few moments last year when I had on currency trades that went 100-200 pips against me. Since on those trades I wasn’t completely confident on them, I used a small position size and wasn’t using any leverage on them, I was able to withstand the fluctuations. Perhaps I had a -0.50% paper loss. Then I asked myself: Is something big going to happen that the market is going to move the market 100-200 pips back to breakeven, then further for profit? After all, you want to have a good reward risk ratio on the trade. So if you are holding a trade with a 100 pip stop loss, then you want to have a reason for the market to move 200, 300 or 400 pips, etc. So I asked myself that question about whether any big macro event or catalyst was going to happen. In the end I decided to hold on, and the Fed did QE 3.0 and I made decent money on it as the market rebounded. I didn’t make 10% or 20% on the trade, because I positioned sized for it very small. That is the price you pay for getting the wrong timing. If you have the wrong timing, then you need to have on a smaller position. You can only use high leverage and big position sizes if you have the right timing.
As Paul Tudor Jones once said:
Under- or overvaluation is only part of the battle. The key thing is to be able to time one’s entry into a position at the precise moment when the market is about to move in your favor. Markets can stay undervalued, say for months and years at a time. You don’t want to waste your resources in that kind of position.
Soros doesn’t always trade longer term. There is a big misconception out there about what he does. On one book cover I have, it says that Soros doesn’t diversify. It says that when buys, he buys as much as he can. That is big misconception. Even then, you have to identify what diversification means and what “buying as much as he can” means. One person thinks diversification is if you own a basket of stocks, but someone else may be smarter and realize that even if you own a basket of stocks, you are still betting on the bullish equity market scenario. One person can interpret “buying as much as he can” as saying he is allocated 100% of his equity to a single trade. Another retail forex trader may think that means he is leveraging 15:1 in a single trade. So everyone interprets things differently.
I have read about Soros holding stock positions for years, but they only represented small percentages of his portfolio, so it wasn’t any big risk.
There is one story described in Hedge Fund Market Wizards, where Colm Oshea talks about Soros. He says Soros had on a very big currency position. He doesn’t say how much, but by the description is it probably about $5 – 10 billion. Then he says Soros had a big paper profit, but then said the market moved against him. He didn’t like the way price was acting. Maybe he was using some innate market sensitivity principles he has developed over the years. Anyway, he decided to dump the whole position right there and then. He seemed to be a price sensitive trader. Because he knows the bigger your position, the faster the market should move in your favor, and the faster you cut it if it moves against you. Of course how fast the market should move and how fast you cut is dependent on your interpretation as well. It depends on what type of risk and volatility levels you are looking for as described in the Money Management and Position Sizing Portion.