Was thinking of one way transactions….deals done in FX that have no speculative element to it…..things like corporate flows, hedging flows, capital flows into a country’s stock and bond markets, trade flows of importers and exporters. How do these large transactions that certainly have an effect on the market shape your trading philosophy/methodology? I know it’s hard to incorporate this part into a trading method because we aren’t privy to such flows, but do you think there is ANY way possible to have this as a part of a trading strategy, as limited as it might be to the info.?
Here’s an interesting conversation on a forum partially regarding this topic on one way transactions…..
One other question….
Suppose we hear a particular hedge fund (or hedge funds plural) are long a particular pair. Will they PUSH the market in their favor? Or defend the market from going down? That is, after they enter, would you say large hedge funds and other large players who have a speculative position on….save some ammo for the future when they might have to defend their stop-losses from being hit and/or to push the market further once the market starts moving in their direction? Or do you think they pretty much enter the whole thing and are completely at the mercy of the market the entire time?
I will give you my perspective, mindset, beliefs and philosophy about it.
I explored the possibility of including things like corp and hedging flows, etc into the mastery course. But in the end I couldn’t see a way to fit it in. It is difficult to explain such things as information is limited. I talked about in the course about how as traders you are dealing with imperfect knowledge and need to make do with what information you have access to and can perceive. Trying to organize the corp and hedging flows into a unifying philosophy and strategy is difficult, and since I was uncertain as to whether it was worth it, I just discarded those concepts.
The way I see it, on the most basic level, trading is a bunch of volatility moves or lack of volatility movements. The inefficiencies consist of the intraday movements and the ODVE, MDMM and GM moves. So you can structure your trades to take advantage of potential near future volatility. There are of course other inefficiencies that take advantage of low volatility environments or anticipated low volatility environments. Things such as selling options, collecting the premium and expecting low volatility to continue. But with attempting to take advantage of low volatility, you have to be careful as if the market becomes volatile, then you can lose a lot of money. Long Term Capital Management (LTCM) blew up because they shorted volatility in the equity markets, but when the markets became volatile with risk aversion during the middle of 1998, they lost a lot of money as the S&P and stocks cratered during July – September 1998, which was amplified by their huge leverage use.
So I would say there is a time and place for many different types of strategies. You just want to apply the right strategy and tactics in the right market environment and moment in time.
There are also all sorts of other inefficiencies, such as quant inefficiencies, merger arbitrage, distressed debt, etc. Most of these require some hedge fund levels of capital to properly implement. I don’t know too much about this, so I don’t want to comment on them and give you any false beliefs.
Therefore, my philosophy is one of finding the identifiable, aggressive, massive, concentrated order flow. If there are a whole bunch of corp and hedging flows, but I can’t identify them and if they are scattered throughout the day and I cannot identify the volatility they cause, then it gets very difficult to profit from it. It just gets confusing trying to apply that type of information to see the volatility in the market.
That is why I focused more of my efforts on explaining the news, sentiment, expectations, scenario analysis, sensitivity, macro, etc. I presented a unifying philosophy in the form of the volatility movements – the ODVE, MDMM, and GM moves that happen across all sorts of different markets. I distill many things down into the news/sent/fund/macro order flow. That is what I try to do. I interpret information to see what will cause a volatility movement. Then I try to apply the right timing and macro model to figure out when I should move in and if so, with how big a position size and risk.
All the information and everything related to directional trading, whether it is chart patterns, tech indicators, value investing, macro, sentiment, etc – I distill everything down into what will cause the volatility movements. That makes my life simpler. So whenever Warren Buffett says something, or there is a news article that shows Soros did this or that, etc, then I try to plug that information through my philosophy and beliefs, to figure out if they will cause a ODVE, MDMM or GM moves, and if so what is the timing. Or sometimes the move has already occurred. Almost everything I want to relate it someway to my volatility mindset and the principles I use such as, news, sentiment, expectations, scenarios, macro, etc.
That helps cut down on all the bullshit out there. I focus like a laser on what will cause the volatility to occur. Everything else I discard, or if it useful info about a potential scenario, then I save it for the future. Of course, sometimes I get it wrong as I may misinterpret the information or get the timing wrong. But I have made the radical pursuit of truth a key goal of my trading.
That is how I was able to escape the vicious technical indicator rat race. I kept asking myself, what is true about the market? What will actually cause the market to move? What actually causes volatility? That led me on a search for the truth about the markets. Started off with tech indicators. Then next step up was chart patterns and price patterns. Then the next level was order flow trading with some stops and barriers. Then the next level of truth was in the form of news trading. Then the next level above that was in the macro trading with knowledge of expectations, scenarios, sensitivity, etc. Then the final level above that would be hedge fund trading with larger position sizes.
So it was a constant search for what was true about the market. And I know, it is hard figuring out what is true or not. There are thousands of books, hundreds of thousands of articles, endless ebooks and videos out there, all these forum posts, etc. Many of my friends and acquaintances had all sorts of bad market beliefs that I was influenced by such as forex robots, etc – and it was very painful overcoming that and developing the right mindset, beliefs, habits, philosophy and attitude.
But once you know the principles as espoused in the mastery course – the ODVE, MDMM and GM and the news, information flow, sentiment, scenarios, expectations, macro, sensitivity, positioning, all trades are not created equal, trade win rate changes, etc, then they are a most powerful philosophy that can be widely applied to all markets.
Also, the greatest trades of the past did not occur because of corporate flows or hedging flows. The greatest trades occurred because of the news, expectations, scenarios, positioning, macro, and proper interpretation of the information flow. That is my market belief.
Therefore, I have not found any way to incorporate corp flows, hedging flows, importers or exporters into my trading philosophy. And I am not going to spend time pursuing it because I do not see the potential in it. I found a much bigger, lucrative, simpler, and fun game in the macro trading and trying my hand at capturing the ODVE, MDMM, and GM moves. That is my market belief. Just because I believe that, doesn’t mean that there isn’t potential there. There always exists potential that you can see something I don’t see. If you do see something, then I would just advise you to try to break down what you see into certain principles. To try to go find some trade examples in the past that showcase how the knowledge of corp or hedging flows, etc could of helped you, etc.
The reason I say that is because there was some very wise advice I once read in my first year or two, when this person told me to break down my trading into certain principles, into a success system. I didn’t really knew what he meant by it in the first year or two. I thought trading was a lot about gut instinct and could not be systemized or put into principles. But as the years went by, I learned to break down my trading philosophy into the various principles shared in the mastery course and into the daily habits. While it was true that I could not 100% systemize it or program it, I could certainly develop very strong principles and guidelines to follow in formulating my daily analysis.
Now, whenever I try to do something, whether it is write a blog post, respond to this email, interpret an article, engage in daily life, etc, I always have certain principles and a strong philosophical foundation to start with that helps to guide me. You can really break down so many things in life into the 5-10 key elements that matter. You can break down a video, or article, or book, etc into the key pieces of information that matter. You don’t need elaborate theories that take up 20 or 50 pages like some academic papers if you don’t like them.
For your second question about the rumors about a hedge fund being long a pair.
First you have to figure out if the rumor is true.
Then even if they are long a pair, you may not know how much.
The if they are long the pair and you know how much, what if it is a small amount? Say 200 mil?
Even if you know they are long a big amount, you may not know their specific pain tolerance point or how they go about taking profits or liquidating the position.
Which is why I usually don’t try to identify any single hedge fund’s pain tolerance point. That happens in certain moments in time when a hedge fund is in panic and may liquidate positions, such as LTCM or Julian Robertson in 1998, and when Amaranth blew up in 2006. For the most part, I lump them into the group called the news/sent/fund/macro market participants. And it is my job for my daily habits and other principles and strategies in the mastery course to catch their action if it is important. This doesn’t mean I don’t respond to headlines, or other things. I know how to interpret information flow for the most part and can figure out if a headline can move the market or not if I am doing my research and keeping up the scenarios in play at any given market moment.
If something is relevant, then it is my daily habits job to capture that and record it in the currency master files, etc.
That is the way I see it. Everything I try to interpret through my daily habits and principles of speculation and my market beliefs. If something is wrong in my daily habits or principles of philosophy or beliefs, then I need to change or tweak it.
In the case of a hedge fund being really long a currency pair, it will only push it in its favor, if they believe that after they push it in their favor, they can entice other market participants to come in and push the market even more upward. They would only do it if they believe that their actions could cause either a stop cascade, or sent/psych shift, or go for the jugular type trade. If they are correct in judging if it will be a stop cascade, sent/psych shift, or Go for the jugular type trade, then they would profit with that extra position size they put on. If they are wrong, then they get their heads handed to them.
They need to be really careful trying to “defend their stop losses.” Defending a particular option barrier level may be worth it if they can make the option payout. But defending a particular “stop loss level” is risky because they are sort of like averaging down. If the trade was so good, they wouldn’t need to average down. The big hedge funds only average down if they believe they still have the news/sent/fund/macro in their favor and something big will happen in the near future, and if they are still within their risk guidelines. They do average down from time to time. But they don’t do it to defend a stop loss level. They only do it if they believe they will have the correct macro forces in their favor in the near future.
So they pretty much are at the mercy of the market most of the time. There are certain situations they can try to finesse it with the stop cascade, sent/psych shift or go for the jugular type trades, but those don’t happen too often and in the vast majority of cases it will come down to the battle of scenarios. The battle of macro scenarios. The battle of the news/sent/fund/macro scenarios and which one is going to win. That is what it comes down to most of the time.
As George Soros said in Soros on Soros:
Everybody says that I have a lot of power. But what does that power consist of? Can I move markets? Perhaps, but only if I guess correctly the direction in which markets want to move. If I guess wrong, I’ll have my head handed to me.
Soros knows that if he gets the macro right, he will make a lot of money. If he gets the macro wrong, then he will have his head handed to him.