For The Future
Talk about Soro’s progression from gold and stock arbitrageurs to more longer lasting, scalable, enduring inefficiencies. He eventually figured out he had to learn how to invest. He had to learn how to trade properly. He had to learn how to find an edge that was long lasting, and still scalable.
Show Depth of Market/Virtual Order Book/Excel Sheet for each trade, before and after each event and during crucial take profit moments. And insert players and sample trade size. Market players can be Market makers, technical traders, news, sentiment, fundamental, macro, option, stop hunters, stops, take profiters, hedgers, sovereigns, central banks, etc
News Trading with Stocks
Adding to the “Conclusion” section:
Always Exercises To Do
The Best Questions To Ask
Under the category “Advanced Mindset”
create lesson called “Being Extraordinary”
Process to be extraordinary and make a lot of money.
I have often believed that if more people realized just how ordinary some rich traders are , there would be a lot more people who succeed in trading.
- Read an article/video/etc
- Discover the fundamental truths
- Ask the right questions
- Discover what they did right or wrong
- If it is good, bring them down to your level
- If it is bad, then acknowledge how to avoid the losses
- Then if it good, you figure out how to one up their trades and then bring them down a notch
- If it is bad, then you figure out how to profit from their losses and then bring them down a notch
- Then you ask the question – What is next?
- Then at the end of the process you are better than them.
[insert example here]
Always remember to:
Think about what the exception to the rule is
Think about what mediocre people believe ‘can’t be done’
Questions To Answer
Why didn’t the big banks do what John Paulson did and make tens of billions of dollars instead of losing tens of billions?
Why didn’t Warren Buffett do what John Paulson did and make tens of billions dollars, thus hedging his losses during 2008 market collapse? That way he could of hedged his net worth from the market fall or even increased it, instead of taking a huge hit like he did.
Why didn’t I do what John Paulson did?
Talk about Richard Dennis making a lot of money before the 1987 crash. He made tens of millions if not hundreds of millions in the preceding years. Then why did he lost it in the crash? What type of trader was he? What were his expectations? How did he manage his orders? Talk about him not detecting the sentiment/fundamental shifts and not performing accurate scenario analysis. After all Paul Tudor Jones detected it, then why couldn’t Richard Dennis?
You bring things down a notch. When you learn something new and good, you may think it is revolutionary and great. And that is fine. Learn the knowledge, absorb it, take action on it. But eventually bring it down a notch. Meaning that what you once that was revolutionary and new, is now common place for you. When you do this you begin to realize that common trading habits and time tested strategies are what lead to success, not some whizbang new forex robot.
Then after you have brought it down a notch, you can start searching for the even better information because your previous information you believed was extraordinary, but is now common place for you. By bringing it down a notch, you create a void that you naturally want to fill. You have a void because what you now know is common place for you and you start to ask the question: What is next? And you begin to start searching for the even better information, strategies, wisdom, and mindset.
Under the category “Advanced Mindset”
under the lesson called “Being Extraordinary”
put in lesson called “Extraordinary Example 1”
When Warren Buffett published an op-ed saying it is time to buy american stocks in like fall of 2008, he has off by around 5 months. Now he is an investor and he is in it for the long haul and willing to hold through substantial drawdowns. But what if he had the timing tools described in this mastery course?
What if he realized that the sentiment was still too bearish and held off buying?
What if he used news impact analysis to gauge the market’s sensitivity and better time the bottom and know when the bulls are taking control?
What if he waited for a stop hunt/false breakout to the downside first and had limit orders waiting to buy on the false breakout?
Under the category “Advanced Mindset”
put in lesson called “Default Thinking”
What is your default thinking? By default I mean normal setting. What is your Normal thinking? Your normal habits? Your normal trading process?
These are important questions to ask because they will affect how you view the market, how you find opportunities, how aggressively you capitalize on them, what habits you have, and ultimately how much money you make.
Everyone’s got some from of basic, normal thinking setting. We all do.
- Technical indicator thinking
- price action thinking
- middle class thinking
- Order flow thinking
As an order flow trader, when I do look at a chart, I don’t see what other traders see. I am aware of chart patterns and price patterns, but I always think about the order flow first.
When I look at a chart I see stops, option barriers, sentiment, fundamental value, sensitivity, market expectations, market bias, news, catalysts, economics, global macro, liquidity, liquidity vacuums, clusters of stop losses, market positioning, pain tolerance points, what will cause billions to move the market either more bullish or more bearish. I try to think about whether a move will be a one day volatility move, a multi day momentum move, or a global macro move. That is what my normal thinking has become like. That is my default thinking. That breeds success.
This is in stark contrast to many other traders who look at the charts and start thinking about moving averages, stochastics, chart patterns, forex robots, jumping from the next system to system on a forum.
[insert examples here]
Yes everyone can change their default setting. Everyone can change their normal thinking. Everyone can change their normal thought processes about the market, life and money.
When you undergo the order flow transformation, you should notice that your default thinking changes to that of viewing the market from the perspective of order flow, liquidity, market participants, expectations, sentiment, sensitivity, stops, option barriers, global macro, etc.
Knee Jerk / First Reaction
This is similar to what is your normal thinking. Except what is your knee jerk reaction to things that happen in your life and in trading? When you take a loss what is the first action that you take? Are you afflicted with fear and can’t trade for two weeks?
A lot of life is how you respond when you face some pain or a setback or are about to. What is your knee-jerk response?
Is your response to just say that the market is not fair.
Or is your response to figure things out, implement the order flow success process, gather the data from news releases?
What is your default thinking in terms of inefficiencies? Are you constantly thinking about attempting to catch the next 30 pip stop hunt or option barrier play? Is that your normal thinking during the day?
If it is, then I would highly recommend you begin to change that thinking to trying to catch the next 100-500 pip move, because the bigger money is in the bigger swings.
I used to constantly think about catching the next stops being tripped or option barrier being targeted. I had tunnel vision in that category. I was too focused on that and was missing the bigger picture of the news/sentiment/fundamental/macro order flow causing multi hundred pip market movements.
Under the category “The Bible of News Trading”
put in lesson called “Handling A Trade Into News”
Now that you have learned the critical components of news trading and analysis, it is time to discuss how to handle a open trade which is going into news.
What does going into news mean?
It means you have an open trade, that you are attempting to make a decision about whether to hold through the news release, close the position before the news release and be done with it, or close the position before the news release with potential for re establishing the trade.
As you now know, news can cause all sorts of market movements from one day volatility explosions, to multi day momentum moves, to global macro moves. This makes it an important to make a decision about whether to hold an open trade through a news release or not.
Because by the time the news is released your profit could have evaporated in the first minute news spike, or the market could of gapped past your stop loss point giving you a bigger than expected loss.
Of course it is always possible the news is in your favor and gives you a bigger than expected profit.
How to handle a trade going into a news release depends on a few different variables:
- How sensitive the market is to the news
- How much leverage/risk per trade you are using
- How big of a pip buffer/locked in profit you currently have
- How close your stop loss is to the current market price
- History of impacts of the particular news you are analyzing on the market
- Market sentiment at the time of the news
Here are a few examples analyzing the above variables:
Under the category “The Bible of News Trading”
put in lesson called “Predicting Tomorrow’s News”
Knowing the fundamental value and knowing what the sentiment is all revolves around knowing how the market will respond to various news, sentiment shifts, and changes in the global macro situation. You have to know how the market has responded to previous news releases, so you can project out scenarios for how the market will respond to future developments.
Once you understand the sensitivity, sentiment, news, and global macro situation, then, after a certain news release, whether in an economic indicator, or a speech, or central bank statements, and it triggers a trade, then you can almost predict what the news announcements will be over the next few hours, and at the end of the day.
If the news trigger causes a multi day momentum move, or global macro move, then you can see it in the news for the current day, and over the next few days.
GBP/USD: News Trade on Sept 21, 2011
Under the category “Currency Pair Specific Order Flow Generators”
put in lesson called “Currency Pair Specific Order Flow Generators and Scenarios”
You have a list of order flow generators and triggers. A big list. Then as the days go by you pick and choose which ones will activate and be relevant on a specific day. They will not all be activated in one day. They will not all be useful all of the time. For example, political order flow generators may only be active and relevant on 4-5 days out of the year. Option Barriers can be relevant 25 days out of the year. News releases can be relevant 40 days out of the year. Big global macro repricings can occur ten times a year.
It is critically important that you have proper expectations alignment. If you think that all the order flow generators will be used everyday, then you will have unfulfilled expectations and that is not desirable and not conducive to massive trading success.
Break down each order flow generators and scenario by approximate pip value.
ex – Less Than 30 Pip Move
Between 30 – 60 pip move
between 60 – 100 pip move
Between 100-200 pip move
between 200-500 pip move
between 500-1,000 pip move
Over 1,000 pip move
Over 3,000 pip move
With Global Macro trades and analysis there can be a feedback loop. An order flow feedback loop.[convert George Soros’s feedback loop into an order flow feedback loop] [describe and give example of a feedback loop]
Under the category “Global Macro Trading”
put in lesson called “Global Macro Order Flow Generators”
A country’s currency tends to rise if it has an expansionary fiscal policy (meaning that the government spending was higher than revenues, meaning they run a deficit), and if the central bank chooses tight monetary policy, meaning higher interest rates.
The United States is currently running a huge budget deficit, has a huge expansionary fiscal policy, but the economic growth and job growth is just not there for the Federal Reserve to raise interest rates. Thus, the U.S. dollar is not rallying extensively.
On the other hand, if the U.S. economic had a deficit, expansionary fiscal policy, while at the same time posting strong economic growth and job growth, then the Federal Reserve can opt for tight monetary policy, raise interest rates causing the U.S. dollar to appreciate in value. Of course, this is assuming that the other countries around the world are not outpacing the U.S. growth.
Now the governments need to be careful, as to not get the deficit out of control. Because if the deficit gets out of control, the credit downgrades can occur, causing a currency to depreciate in value.
Yes the gold rally can potentially help aud for sure. It can also cause retracements at other points. So for example Aud/usd right now has retraced a lot more than eur/usd off the highs partly because commodity prices have gotten hit past 2 days. Now over the longer term commodity prices are still elevated and that has helped the aud/usd reach new all time highs, while the eur/usd has not.
The gold relationship has about two potential order flow drivers:
1. If people see the rally in gold and decide, to just purchase aud/usd because of that.
2. If the gold rally results in the australian exports/economy to boom. Then those australian companies have a lot of money and profits, and start to pay their workers a lot of money. Those workers go out and spend the money and create a lot of inflation. And then the RBA increases rates. So the whole commodity boom is important only because the market participants believe that it will increase Australian growth, consumer spending, and thus inflation and higher interest rates faster than otherwise would be normal.
Why doesn’t the yen sell off much more during Japanese credit downgrades?
There are two reason:
1. There are global macro sellers in the JPY crosses that love to sell the jpy crosses when a spike up happens due to the current slow growth global macro environment.
2. There are still many people in Japan willing to invest in their own countries government bonds even if there is a credit rating downgrade. In other words there isn’t going to be a massive capital flight from the country due to a credit downgrade.
From Paul Tudor Jones Documentary
1. November 26, 1986, PTJ tries to go long the S&P. Get a chart.
2. Dec 5, 1986, PTJ tries to go long the S&P. It looks like he lost a few points per contract. If he was long thousands of contracts, then it makes sense that he lost 5% or 6 million dollars. Get a chart.
3. February 17, 1987, PTJ went long the S&P 500. Was he long 10,000 contracts? He made over $5 million dollars. It looks like he made five or six S&P points. He caught a one day volatility explosion. Get a chart.
Even top hedge fund managers can get caught buying at the highs or shorting at the lows. They can put on a position right when the market move is fizzling out and there is no more momentum.
Here is an example from George Soros in 1998:
In the article it reported that Soros shorted the British Pound with a position of $8 billion at around May 12, 1988. Now that was the date it was reported. No one can know for sure if he shorted it on that day, or whether he shorted it a week prior, or whether he even was short the pound. But that is what the news reported and that is what I will go with and assume as fact.
He seemed to short the GBP/DEM currency pair
Let’s pull up a chart[insert chart here from GBP/DEM May 1998]
Complete This Super Easy Exercise
Left Side. Write down all the people who benefit from your success and money
Right Side. Write down all the people denied these benefits if you fail.
Resilience and Quick Recoveries
Soros also lost $800 million dollars on a long trade in the Indonesian rupiah during 1997 when the market moved painfully against him and the position was illiquid too.[insert chart here]
Statistics Do Not Cause Anything To Happen
- June 9, 2011 – Natural Gas Flash Crash
- May 5, 2011 Commodity Flash Crash
- March 16, 2011 – USD/JPY drop
- August 11, 2010 – EUR/USD drop
- May 6, 2010 Stocks Flash Crash
- Housing Bubble – Greenspan says once in a century
- August 16, 2007 – USD/JPY drop
- October 1998 USD/JPY drop
- February 14, 1994 – USD/JPY drop
- 1992 – Black Wednesday – Breaking the Bank of England
- 1987 Stock Market Crash
Opportunities and inefficiencies that can be applied to all markets in general are (with varying degree of information accessibility):
option barrier inefficiencies
global macro inefficiencies
The news, event expectations, general expectations, sentiment, fundamental, and macro inefficiencies manifest themselves in the one day volatility explosions, multi day momentum moves, and global macro moves.
9. Record a ‘Market Day’s Events proprietary sheet’ for each currency pair that you want to trade. This is where you can actually start assigning meaning and pip values to the movements. You have two columns. One bullish. One bearish.
Order Flow Portfolio Exposure Theory (lesson)
Here is the Order Flow Portfolio Exposure Theory – work in progress.
This order flow portfolio exposure theory has been a work in progress for years, so do not take it lightly. It is not based on some modern portfolio theory, wild eyed fundamentals, chart patterns. It is not based on anything like that. It is based on order flow, massive order flow and everything that will generate such movement. Orders, a series of orders need to be placed. Massive Orders need to be placed.
We will be using this theory and model extensively in the order flow course training to come. It will help us in determining how the various market players are positioned, and where on the exposure chart they are, and what expectations they have.
What is the optimum allocation? What is the optimum position exposure? What is the optimum position sizing? That depends on the true probabilities of the trade succeeding according to how much massive order flow there will be. We will discuss this endlessly.
We will also discuss many different scenario and order flow generators that show people who were grossly miss positioned and should of been somewhere else on the exposure level, according the the order flow if they were paying attention.
Thai Baht 1997 collapse
The Lira devaluation happened on September 11 and over that weekend in 1992.[insert chart of the Italian lira here]
————————————————-[insert example of article where the title and content is bullshit]
[insert example of article where I decipher the true meaning]
[insert example of article where the title and content is bullshit]
[insert example of article where title is good, but I isolate the true meaning]
It is all about the order flow. All about the transaction flow. What people are willing to pay. Take an example of Facebook buying Instagram. One person may look at the deal and say the company has never made a profit and is losing millions every year so they would think it crazy to spend $1 billion to buy it. Yet Facebook did buy them. They got the transaction done. They were willing to pay it and executed the transaction.
Similar situation with internet stocks in the dotcom bubble that had no revenue. They were bought up to astronomical levels because someone was willing to pay those prices. It is all about the order flow/transaction flow. Sometimes it doesn’t matter if the company has revenue or not or or whether it has any rational measures of valuation. The only thing that matters is what the other people is willing to pay. At what price will a transaction occur.
News Trading Section, Examples of News Trading:
Here are some examples of news trades. This is not the complete list. There are many more. Hundreds more over the years. Here are just some of them.
EUR/USD May 9, 2010: Massive bailout package released totaling almost 750 Billion Euros over the weekend. 200 pip gain in 24 hours. Euro euphoria. (Oanda Weekend Inefficiency here)
GBP/USD May 11, 2010: GBP euphoria after Cameron-Clegg pact
GBP/USD May 12, 2010: BoE Inflation Report. GBP sells off hard.
AUD/USD May 12/13, 2010: AUD Employment numbers
EUR/CHF or USD/CHF June 17, 2010: SNB Monetary Policy Assessment. Intervention risk was removed, market had to reprice and chf pairs collapsed.
EUR/USD July 2, 2010: Non Farm Payrolls. 56 pip gain in 6 minutes.
EUR/USD: March 4,2011: ECB Press Conference: Trichet “strong vigilance” results in News trade bullish EUR/USD with a new spike + Go for one day volatility explosion.
USD/JPY March 14, 2011: Earthquake and crashes through 80.00 barriers + Risk Aversion + stops tripped in low liquidity. Talk about long consolidation with finally a big enough trigger/catalyst to cause the breakout.
EUR/USD April 27, 2011: Surges after FOMC statement. You could of gone long from around 1.4677 and rode it all the way to 1.4850 +
USD/JPY July 11, 2011: Noda Comments that JPY level is not excessive, european soverign debt crisis, stocks falling, risk aversion, stops below 80.50. Talk about long consolidation with finally a big enough trigger/catalyst to cause the breakout.
1. Noda said recent Yen move is not excessive.
2. That opened up the downside for the yen crosses. Then they dropped.
EUR/USD, GBP/USD, USD/CHF, USD/JPY, AUD/USD, NZD/USD, USD/CAD, Gold, Silver July 13, 2011: Fed Chairman Bernanke Testifies indicates further possibility of QE 3.0
NZD/USD, EUR/NZD July 13, 2011: NZD GDP q/q
USD/CHF July 29, 2011: U.S. GDP report. Compare it to USD/CAD response. Explain the alpha. Explain easy money vs difficult money. Explain the Canadian economy relationship to the U.S. economy.
Examples of Global Macro Trading
2007: Housing Market Plunges, ABX Index Plunges
John Paulson vs John Devaney duke it out in 2007 in the subprime market. Paulson was ramping up his bearish housing bets in the first half of 2007, while Devany thought the drop was a time to bargain hunt.
One person recognized the fundamental/sentiment/global macro shift, while the other person did not recognize the shift and thought it was a time to bargain hunt.
What was John Paulson’s short trade betting on?
- Reason #1 here
- Reason #2 here
- Reason #3 here
- Reason #4 here
What was John Devaney’s long trade betting on?
- Trend was still up. Buy on dip standard mentality.
- Bargain hunting on a retracement
- Market over reacting to some housing news
- Thought he was buying value
- Thought sub prime problems were temporary and would not spill over into full fledged crisis.
- Believed lower Federal Reserve interest rates were going to prop up/save housing (after summer 2007)
- Believed that the federal government would intervene to support housing in other ways using stimulus, homeowner relief/bailouts, etc to limit the damage and prop up the housing market and prevent excessive losses and thus prop up the prices of the housing related financial instruments.
The above was a large part of the rationale for the bullish case in the housing market. What the above people failed to realize was that the news/sentiment/fundamental/macro order flow would be so overwhelming that the government couldn’t possibly stop the recession and housing crash from happening.
Another reason why some people invested in subprime was because they thought they didn’t have exposure to the worst parts of it, and thus thought they would be fine if things started to deteriorate.
Here is the Bloomberg article “Banks Sell Toxic Waste CDO’s to Calpers, Texas Teachers Fund.”
The key paragraph is:
[blockquote align=”center”]One of the things that’s going to be helpful to us is that we don’t have a lot of exposure to 2006 subprime loans. I think that is going to help us deflect any exposure should subprime collapse.[/blockquote]
What they failed to realize was that it didn’t matter whether they have exposure to 2006 subprime loans or 2005 subprime loans or 2004 subprime loans. They were all betting on pretty much the same macro scenario. If subprime collapsed and took the economy with it, all of them would go bad and take huge losses.
People in a panic can sell first and ask questions later. They won’t give a damn if a security is packaged with 2005 sub prime loans or 2006 sub prime loans. They just want to get the hell out in a panic and sell.
John Devaney ended up suffering crippling losses in 2007/2008. John Devaney personally lost more than $150 million of his own money during 2007-2008.
John Devaney getting caught on the wrong side of the news/sentiment/fundamental/macro order flow:
John Devaney lost over 50% of his net worth during the mortgage meltdown. He didn’t practice the principle of never betting your lifestyle. Although he still was left over with $50 million.
Remember what Paul Tudor Jones said in Market Wizards:
[blockquote align=”center”]Why not make your life a pursuit of happiness rather than pain?[/blockquote]
Examples of Global Macro Trading
May 2 – 4, 2010: Top in the JPY crosses
Examples of Global Macro Trading
May – June 2010: USD/CHF in major uptrend with minor retracements.
You had a very interesting macro situation form in USD/CHF during May – June 2010. USD/CHF surged a thousand pips higher with very small retracements. Why was this so?
Well EUR/USD and USD/CHF can be inversely correlated, meaning that whatever one does, the other will do the opposite. You had a situation in EUR/USD where the sovereign debt problems flared up and EUR/USD started dropping hundreds and thousands of pips. This massive EUR/USD selling was feeding into USD/CHF buying. The more EUR/USD went down, the more there was buying pressure in USD/CHF.
However, this was not the most interesting element to the puzzle. For if the EUR/USD shorting stopped and the market snapped higher, then USD/CHF would of collapsed lower as well.
But there was a much bigger element in play during that time period. This came in the form of the Swiss National Bank intervention in EUR/CHF during that same time period. The Swiss National bank was defending the 1.4320 level as well as the 1.4000 level with massive limit bid orders. They even went on the offensive and bid up the market in EUR/CHF several hundred pips higher in an aggressive intervention attempt during May 19 – 21, 2010.
All these huge limit bids in EUR/CHF fed into USD/CHF being bid on dips as well. Therefore the downside in USD/CHF was temporary protected because of the massive limit bids in EUR/CHF. This led to a very good long trade in USD/CHF which benefited from the EUR/USD weakness, but also the downside was protected because the SNB was attempting to stop the EUR/CHF from going lower.
Examples of Global Macro Trading
French Franc collapse after election of socialist Francois Mitterrand.
Comment on it and include it for analysis with bloomberg charts.
- 1991 – November 23, 1991 – Traders rushed to buy Deutsche marks Friday. The dollar was falling for the past week due to U.S. economic malaise. The German currency’s gains stemmed from sudden speculation of a coming revaluation of the mark. The dollar lost 5 pfennig, or just over 3 percent since late last week, with a mini-stock crash and alarmingly weak economic data convincing the market that more interest rate cuts are needed to shore up the U.S. recovery. DEM/USD, GBP/DEM, Spanish Peseta, DEM/JPY,
Global Macro Opportunities
The scramble for commissions distorts investment and trade choices. The big banks during the housing boom were scrambling for commissions from all those toxic mortgage debt they were selling. They were hungry for more commissions. Eventually led to them holding on to some really bad real estate related assets.
They got high on their own supply.
Took billions in losses.
Some of them went under or were forced to get bought out.
The hunt for commissions blinded them to the true risks that they were taking. It is sort of like buying an investment that is yielding a hefty amount. You are happy that you are getting a lot of cash flow and a nice yield. But it blinds you and you stop asking the right questions. Or you never asked the right questions. They never asked if their principal was safe. Then all of sudden the investment blows up and you take massive capital losses.
They weren’t asking the right questions.
Instead of thinking about how in the world they were going to unload tens of billions of illiquid financial instruments they were carrying on their books, they were thinking about how to increase their commissions and feed their CDO production lines.
Example of AUD intervention in illiquid market helped to cause a sent/psychological shift and the market did not really want to test the RBA resolve. But it was also because of some macro bids:
Aggressive Example: Reserve Bank of Australia Intervention on October 28, 2008
Central bank intervention failures:
GBP/DEM in 1985 – 1990 Bruce Kovner
Canadian dollar early 1980’s
GBP in 1976
Under Putting It All Together chapter: a lesson called:
Stop Hunting + News + Sentiment + Sensitivity + Global Macro
The most powerful order flow trades tend to occur when you combine many or all of the order flow methods together.
That is typically when the best entries and exit strategies can be found.
So now you know that the market has to leaves clues. You know what type of moves you are trying to catch with the ODVE, MDMM, GM, etc. You know the process for taking it day by day and week by week. Now lets get into many examples.
Difference Between Poker and Trading
A key difference between poker and trading is that with trading you do not need to risk all your winnings in a single trade(hand) even when faced with a difficult position. You can always just exit the trade or reduce position size. You never have to bet all your chips or all your profit.
What Was The Maximum Leverage I Used?
Back when I use to engage in extremely highly leveraged news trading, my leverage used to be as high as 25:1 at some points. I was exploiting short term news trades and was willing to take the risk. It is not a long term strategy though. You never want to be trading a system that is levered 25:1 in every trade. My goal was just to produce insane trading returns to bring the account up to a respectable level at which point leverage gets reduced down to the normal level below 5:1. In fact if you are trading and your account experiences rapid success, and your account grows from $25,000 to $50,000 to $100,000 to $500,000 you will most likely gradually be reducing your leverage as your account grows and grows.
Well as your account grows you are placing larger and larger orders into the market and eventually have to take into account slippage and liquidity considerations.
Hedge funds, at least the rational ones don’t try to use excessive leverage. They go for the big global macro moves. The biggest hedge funds that use excessive leverage are the ones that set themselves up for collapse.
Accepting / Holding Through A Pullback
If you are in a trade that is in the profit by 1,000 pips, and you want to holdout to potentially make more, you HAVE to be willing to accept some sort of potential retracement. Whether it is a 10% retracement of the move, 20%, or 30%. You need to be willing to see some form of paper profits evaporate. You need to risk a pullback in order to hand in the trade in order to potentially make more money as the market retraces then begins to move in your favor again.
Some hedge funds may choose to buy vanilla options in order to protect some profits. They can buy vanilla options in the other direction to hedge their profits. For example if they are heavily short and have a 1,000 pip paper profit, then they can buy some call options in order to hedge themselves from the market retracing. Or they can choose to just take some profit off and trim the position.
Inefficiencies difference lesson
Who’s Got The Bigger Balls?
Sometimes trading can be about who has the bigger balls between large market participants. Lets say that you are a big hedge fund manager and that you believe a big move is going to happen. You want to get in a $1 billion dollar order to go long. After you get filled and attain your desired exposure, you can set some huge limit orders of another billion or two below the market. You spread word that there are huge orders and try to bluff the other market participants that you are crazy and want to put on a huge trade. You want to spook and scare the market with your huge orders. Since you already have your desired exposure of $1 billion, you want other people to come into the market to generate order flow and move the price higher in your favor. You attempt to scare people to cover their short trades because you are scaring them with huge orders near the market.
The risk with this strategy is that the market proceeds to fill your additional orders and you end up with a much bigger position than you wanted.
Hedge fund does not want to lose their position
Let me show you an example of one of my trades where I lost my position. I bailed out with a small profit instead of just keeping my stop to break even and maintaining my exposure to the market.
I was short USD/CAD from 0.9555. It was working out fairly well. Some bad Canadian CPI numbers came out on Friday July 22 that caused the market to move higher. I held through that just fine. But I bailed out of the trade on Sunday as I was unsure if there would be a wave of risk aversion and going to take out my stop at break even. Only a 44 pip profit. If I kept the trade and held on to my position then I would be up another 80 or 100 pips. I would of been able to maintain my exposure to the market that I wanted.
I got shaken out and thus “lost my position.” I was still bearish on USD/CAD and expecting some decent swing trading momentum to develop so I did want to keep it, but unfortunately some emotions got the better of me and I bailed out prematurely. I lost my position and now cannot participate in the USD/CAD drop if it occurs. I could short it from current market prices, but I don’t want to be chasing the market. I had a nice short entry from 0.9555, but I lost my position. If the market breaks a few hundred pips lower now, I cannot participate in the move. I lost my position and my desired exposure.
Show stop size examples to how big a move you expect and how to position size for it. [what did I mean by this???]
get chart for liquidity difference lesson showing USD/DEM in 1989?
Examples of Big Hedge Fund Trades
1987 Stock Market Crash – PTJ, Soros, Druckenmiller
Blow by Blow – Soros, Druckenmiller performing short term tactical trading during Black Monday from More Money Than God
Compare Soros vs Druckenmiller and the sizes of their funds. Druckenmiller had enough liquidity to bail out of the market and reverse on Black Monday. But Soros was managing too much money to be that nimble. He could not liquidiate his position that easily. Soros was trying to dump a $1 billion dollar long S&P futures position.
Thus, Soros became the elephant when he went to dump his huge position in stock index futures contracts. After he finished dumping his position, the stock market bottomed out, stabilized, and started moving higher. During the 1987 Stock Market Crash, it was rumoured that Soros lost up to $800 million dollars. Soros says that he only lost $300 million.
Portfolio insurance during the 1987 Black Monday stock market crash was one big gigantic stop loss order.
1992 Other European Currencies collapse – Italian Lira, Finland, Sweden
1994 Bond Market Collapse – Steinhardt
Michael Steinhardt held a massive $30 billion dollar position being long bonds at around December 1993. He was leveraged around 5 or 6:1. What were his expectations? What was his reasoning? Why was he generating billions of dollars of bullish order flow? Was the trade crowded? If so, what were the other market participants thinking? What were his pain tolerance points?
He went on vacation, when he should of been watching the markets like a hawk, performing scenario analysis, seeing where his trade could potentially go wrong. He should of been getting and staying in harmony with the order flow and information flow. He should of been asking the right trading questions?
Similar thing happened with me. I would catch a nice trade, have a large paper profit, bet my stop to break even. Then you go on vacation or get lazy about watching the markets. Next thing you know some news comes out that causes your 500 pip paper profit to evaporate. While if you were at your desk or trading stations you may have been able to perceive the sentiment/fundamental value shift and then gotten out with a good profit. Even have the potential to place a trade in the other direction as well.
ex – Euro drop after Trichet Press conference.
1997 Thai Baht Collapse (Asian Financial Crisis) – Soros, Robertson, PTJ
1997 Indonesian Rupiah Collapse – Soros Loses $800 million
2007 – Paulson Shorts the housing market
All sorts of people who owned the mortgage backed securities thought they were diversified because they acquired loans from all over the country, even from different lenders.
What they didn’t realize was that they were all betting on the same macro scenario. They were all expecting house prices to continue moving higher, meaning they expecting continued strong economic growth, low unemployment, etc. They were certainly not expecting a recession.
Once economic growth started slowing, unemployment went up and house prices started falling. It didn’t matter if they had diversified across many states. Everyone one was going to be affected by the new global macro situation.
[insert chart of the ABX index that he bet against]
If you wanted to place a bearish bet on housing, then you could short the ABX index. If you wanted to place a bullish bet on housing you would go long the ABX index.
Paulson said about the banks in this article: http://www.portfolio.com/executives/features/2009/01/07/John-Paulson-Profits-in-Downturn/
They felt that by having 100 different tranches of triple-B bonds, they had diversification to minimize the risk of any particular bond. But all these bonds were homogeneous. It was like having 100 different pieces of the same poisoned apple pie. They all moved down together.
Marty Schwartz describes the George Soros firesale on the week of the stock market crash in 1987. Pages 170-171 in the book Pit Bull.
Learning trading would of been far easier and faster if every day you would get asked the questions: What moves price? What will generate order flow?
Other Intraday Events lesson
Not all events and market moving news can be found through the financial news website articles and forex calendar.
There can be many pieces of news and developments and reasons for price moving that occur during the day.
In order to identify these events you should do a recap of IFR and forexlive.
You can record these under “other intraday events.” Or you can throw them in with the other news articles and have them under one section.
Friday August 19, 2011
OF Generators lesson (old strategy as I have already revised this)
Now you can take all the information gathered from your news articles, data from news releases, to establish order flow generators.
You can begin to add bullish and bearish order flow generators and scenarios to a master list for each currency. A master list is nothing more than a sheet that lists what would cause a currency to rise or fall. It can be a certain economic numbers that comes out of expectations. It can be a rise or fall in interest rate. It can be central bank intervention. It can be a few key words from a central bank official. It can be risk appetite and risk aversion.
Friday August 19, 2011
Market Days Events lesson
Every traders loves to explain why price has moved in the past. They love to explain why price moved in their favor if they had a nice trade. The technical indicator traders like to cite moving averages, divergences, MACD, RSI, etc.
The chart pattern and price action traders love to cite the support and resistance, head and shoulders, retracements, bullish and bearish engulfing patterns, trend lines, fibonacci etc.
Well the order flow trader most certainly has their own way to rationalize why price has moved.
This is more of an optional approach. I like to use this when I hit a cold streak and want to attain a higher level of harmony with the order flow and information flow. I do this exercise and it usually helps me immensely to get a better feel for the order flow.
It is very simple and incorporates aspects from the news articles, and forex calendar releases, and other intraday events.
You just put in a nice timeline for bullish/bearish columns for each currency pair to describe how the action unfolded blow by blow, price movement, by price movement, big move, by big move.
You can do this for as many currency pairs as you like. But the more currency pairs the more work it is. So just stick with only a few currency pairs in the beginning so you do not get burned out.
I know it seems like a lot of work in the beginning, but there is just an initial hump you need to get over. Once you have a template for the global macro environment and triggers for each currency, then the work gets much easier as you just tweak the OF generators, triggers, and scenarios as the sentiment shifts and news comes out.
It is just that in the beginning you need to just a nice list going of all the factors and variables that affect each currency pair and it seems like a lot of work.
Friday August 19, 2011
Here are a few example from how a Market Day’s Events would look like for the following currency pairs:
February 10, 2012 Example:
Before we get into the scenario analysis and labeling the stops and barriers on the chart, let me go over how to do the “Market Day’s Events” exercise.
You have two columns, one for bullish order flow generators, the other for bearish order flow generators. You list each perceived order flow generator for that specific day, both passive with limit orders, and aggressive with market orders for the financial instrument on that specific day.
Here is an example for the EUR/USD for February 10, 2012:
- Anyone betting on a successful Greece debt deal
- Profit taking on short trades
- George Karatzaferis, head of the LAOS party, said on Friday he cannot vote for the loan agreement caused macro sellers
- Reports of resignations by government ministers in protest against the bailout agreement caused macro sellers
- Risk aversion sellers from fall in equity markets
- Profit taking on long trades
- Stops below 1.3240/30 tripped
- Stops below 1.3200 tripped
For the AUD/USD your sheet could look like this for February 10, 2012:
- Anyone betting on risk appetite and carry trade
- Anyone betting on successful resolution to Greek debt deal
- Profit taking on short trades
- RBA revised growth expectations lower causing macro sellers from those betting on interest rate cuts
- RBA revised inflation expectations lower causing macro sellers from those who were betting on interest rate hikes
- Lack of Greek debt deal led to macro sellers
- Commodity prices dropped leading to some macro sellers
- Profit taking on long trades
- Stops below 1.0740 tripped
- Stops below 1.0700 tripped
- Stops below 1.0670 tripped
The Complete Order Flow Mastery Course -VERY OLD
- Introduction to Order Flow Mastery Course
- New Trading Environment
- What Is Order Flow Trading Mastery
- What is Technical Indicator Trading And Why It Fails
- What is Price Action Trading And Why It Fails
- The Market Leaves Clues
- My Trading Journey
- Order Flow Foundations
- Overcoming Market Conspiracies and Falsehoods
- Overcoming Order Flow Misconceptions and Fears
- Overcoming The Confidence Gap
- Why Traders Fail
- Poor Risk Reward Ratio
- Let Emotions Get To Them
- They Do Not Keep A Trading Journal
- Trading With Scared Money
- They Use Too Tight Stops / Try to Scalp The Market
- Oblivious To The Information That Does Not Appear On The Chart
- Disciplined To Find Opportunities Every Time They Should
- They Practice The Blame Game
- They Claim They Have No Money
- They Claim They Have No Time
- They Think They Are Too Old
- They Think Now Is Not The Time
- They Are Afraid To Learn And Acquire New Skills
- They Think Other People Have Got It Easier
- Trading System Has No Edge
- Why Order Flow Traders Fail
- Get Rid Of The Layers
- Information Outside Of The Charts
- You Got To Have A Reason
- What is a Trading Edge?
- What is the Holy Grail?
- The Decision To Succeed
- Focus On Success Stories
- Wealth Attraction For Traders
- Endless Stream Of Opportunities
- No Guilt
- Markets Do Not Care Whether You Are A Good Or Bad Person
- Applied Order Flow Knowledge
- Fears of New Wealth
- Attract The Best Trades Do Not Force Them
- Network With Other Wildly Successful Traders
- Resilience And Quick Recoveries
- You Are The Wizard And Guru
- Wealth Attraction For Order Flow Specific Traders
- Do It Today Not Tomorrow
- Personal Responsibility
- All Trades are NOT Created Equal
- Trade Win Rate does NOT Stay the Same
- Statistics DO NOT Cause Anything To Happen
- It Takes Less Work To Succeed Than To Fail
- Failure Costs Much More
- Sudden Success Syndrome
- Sudden Wealth Syndrome
- Order Flow Habits
- Order Flow Success Process
- Order Flow Success Secrets
- You Don’t Need Talent
- Daily Habits and Regimen
- Recording Daily Market Sentiment and Articles
- Recording Articles 1
- News Impact Releases – Article 1
- Recording Articles 2
- News Impact Releases – Article 2
- Interpretation – Article 2
- Recording Article 3
- News Impact Releases – Article 3
- Interpretation – Article 3
- Recording Article 4
- News Impact Releases – Article 4
- Interpretation – Article 4
- Other Intraday Events 4
- OF Generators 4
- Market Days Events 4
- Recording Article August 22, 2011
- News Impact Releases August 22, 2011
- OF Generators August 22, 2011
- Recording Article August 23, 2011
- News Impact Releases August 23, 2011
- OF Generators August 23, 2011
- Recording Article August 24, 2011
- News Impact Releases August 24, 2011
- OF Generators August 24, 2011
- Recording Article August 25, 2011
- News Impact Releases August 25, 2011
- Recording Article August 26, 2011
- News Impact Releases August 26, 2011
- Recording Article August 29, 2011
- News Impact Releases August 29, 2011
- Recording Article August 30, 2011
- News Impact Releases August 30, 2011
- Recording Article August 31, 2011
- News Impact Releases August 31, 2011
- Recording Article September 1, 2011
- News Impact Releases September 1, 2011
- Recording Article September 2, 2011
- News Impact Releases September 2, 2011
- Recording Article September 5, 2011
- News Impact Releases September 5, 2011
- Recording Article September 6, 2011
- News Impact Releases September 6, 2011
- Recording Article September 7, 2011
- News Impact Releases September 7, 2011
- Recording Article September 8, 2011
- News Impact Releases September 8, 2011
- Recording Article September 9, 2011
- News Impact Releases September 9, 2011
- Recording Article September 12, 2011
- News Impact Releases September 12, 2011
- Recording Article September 13, 2011
- News Impact Releases September 13, 2011
- Recording Article September 14, 2011
- News Impact Releases September 14, 2011
- Recording Article September 15, 2011
- News Impact Releases September 15, 2011
- Recording Article September 16, 2011
- News Impact Releases September 16, 2011
- Recording Article September 19, 2011
- News Impact Releases September 19, 2011
- Other Intraday Events September 19, 2011
- Recording Article September 20, 2011
- News Impact Releases September 20, 2011
- Recording Article September 21, 2011
- News Impact Releases September 21, 2011
- Recording Article September 22, 2011
- News Impact Releases September 22, 2011
- Recording Article September 23, 2011
- News Impact Releases September 23, 2011
- Recording Article September 26, 2011
- News Impact Releases September 26, 2011
- Recording Article September 27, 2011
- News Impact Releases September 27, 2011
- Recording Article September 28, 2011
- News Impact Releases September 28, 2011
- Recording Article September 29, 2011
- News Impact Releases September 29, 2011
- Recording Article September 30, 2011
- News Impact Releases September 30, 2011
- Recording Article October 3, 2011
- News Impact Releases October 3, 2011
- Recording Article October 4, 2011
- News Impact Releases October 4, 2011
- Recording Article October 5, 2011
- News Impact Releases October 5, 2011
- Recording Article October 6, 2011
- News Impact Releases October 6, 2011
- Recording Article October 7, 2011
- News Impact Releases October 7, 2011
- Recording Article October 10, 2011
- News Impact Releases October 10, 2011
- Recording Article October 11, 2011
- News Impact Releases October 11,2011
- Recording Article October 12, 2011
- News Impact Releases October 12, 2011
- Recording Article October 13, 2011
- News Impact Releases October 13, 2011
- Recording Article October 14, 2011
- News Impact Releases October 14, 2011
- Recording Articles 1
- Recording Daily Market Sentiment and Articles
- What You Need
- Habits of Highly Successful Order Flow Traders
- Order Flow Mindset
- Success Thinking
- Possibility Thinking
- Trades Which Are Impossible To Lose Exist
- You Can Convince Yourself Of Anything
- Where the BIG MONEY Exists
- One Day Volatility Explosion
- Multi Day Momentum Move
- Global Macro
- Shorter Term Inefficiencies
- News Trading Inefficiencies
- Stop Hunting Inefficiencies
- Option Barriers Inefficiencies
- How To Banish Fear
- Trading Inefficiencies Progression
- Road To A Million Dollars
- Easy Money Vs Difficult Money
- Enduring Vs Non-Enduring Inefficiencies
- Will The Inefficiencies Still Exist?
- Global Money Flow
- Who’s Got The Money?
- Fortunes Are Made And Lost
- The Order Flow Mastery Super System
- Order Flow Action Model
- Order Flow Portfolio Exposure Theory
- Order Flow Liquidity Model
- Ideal Goal Of A Order Flow Trader
- The Entry Is Only Part of The Battle
- Economics Primer
- Order Flow Reminder – Economics
- Good Inflation
- Bad Inflation
- Wage-Price Spiral
- Interest Rates
- Risk Appetite
- Risk Aversion
- Safe Haven Currencies
- U.S. Dollar
- Japanese Yen
- Swiss Franc
- Biggest Economic – Trading Link Mistakes
- Nationality Bias
- Information Outside Of The Charts
- IFR Markets
- Deciphering IFR
- 4 Cast
- Dow Jones News
- UBS News
- News Websites
- Financial News Websites
- IFR Markets
- Key Concepts to understand
- Order Flow
- Information Flow
- Liquidity Analysis
- Sentiment Analysis
- Expectations Analysis
- Scenario Analysis
- Different types of Market Participants
- Technical traders
- Trend and Breakout traders
- Momentum traders
- Global Macro/Sentiment traders
- Stop Hunting
- Intro to Stop Hunting
- Why do people hunt stops
- Liquidity Vacuum
- How to locate the stops
- Chart Way
- Oanda Open Orders Book
- Option Barrier Stops
- Different types of Stop Hunts
- Intraday Position Squaring
- Building up a position
- Quick Profit / Easy Pickings
- Stop Cascades
- Sentiment / Psychological Shifts
- Going for the Jugular
- Option barrier stops hunted
- Different types of Stops Tripped
- Stops Hunted
- News Trips Stops
- Sentiment/Global Macro Trips Stops
- Different types of Stops
- Physical Stops
- Mental Stops
- Stop Position Adjusting
- How to use stop hunting in your trading
- Becoming the Hunter
- Fading the Stops
- Examples of Fading Stops
- Stop Hunting vs Price Action
- Examples of Stop Hunting
- Examples of Stops Being Tripped
- Examples of Stops Being Tripped – Cont
- Examples of Stops Being Tripped 2
- Biggest Stop Hunting Mistakes
- Option Barriers
- What Is An Exotic Option Barrier
- Vanilla Options Puts and Calls
- One Touch
- No Touch
- Double One Touch
- Double No Touch
- Digital Option
- Who uses Option Barriers?
- Why Do People Use Option Barriers?
- Exotic Options FAQ
- Option Terminology
- Finding the Barriers on the Chart
- Examples of Option Hunts
- Examples of Option Hunts 2
- Barriers Hunted or Not?
- Failed Option Hunts
- Biggest Option Barrier Mistakes
- What Is An Exotic Option Barrier
- Market Sentiment
- Fundamental Value
- During illiquid sessions / holidays
- Interpreting News Articles and Commentary
- Order Flow Reminder
- The Bible of Forex News Trading
- Intro to News Trading
- News Trading Foundations
- Advantages of News Trading
- News Releases Recording Method
- Example 1
- Example 2
- Example 3
- Example 4
- Example 5
- Non Scheduled News
- Getting The Data
- News Spreads
- Market Sensitivity and why it can make or break you
- Why News is So Important
- Why News can give crystal clarity
- How NOT To News Trade
- News Spike
- How to News Trade Properly
- Getting The News In A Reasonable Time
- Different Types of News Trades
- How To Use News Trading
- Examples of News Trading
- Stop Placement
- Profit Targets
- News Trading and Fundamental Value
- High Probability News Trading
- Placing Trades Which Are Impossible To Lose
- Predicting Tomorrow’s News
- Handling A Trade Into News
- Biggest News Trading Mistakes
- News Trading with Stocks
- Global Macro Trading
- Intro to Global Macro
- Global Macro Foundations
- Global Macro Foundations 2
- Different types of Global Macro trades
- How to use Global Macro
- Global Macro Order Flow Generators
- Examples of Global Macro Trading
- Biggest Global Macro Trading Mistakes
- Weekend Inefficiencies
- Sentiment Examples
- Fundamental Value Changes Examples
- FV Weekend Inefficiency 1
- FV Weekend Inefficiency 2
- FV Weekend Inefficiency 3
- FV Weekend Inefficiency 4
- Biggest Weekend Inefficiencies Mistakes
- Order Flow Generators
- U.S. Dollar
- British Pound
- Swiss Franc
- Japanese Yen
- Australian Dollar
- New Zealand Dollar
- Canadian Dollar
- Currency Pair Specific Order Flow Generators and Scenarios
- Central Bank Intervention
- Types of Intervention
- Putting It All Together
- Stop Hunting + News + Sentiment + Sensitivity + Global Macro
- How To Trade Without Charts
- Getting Addicted to Order Flow Trading Success
- The Sixth Sense Of Order Flow Trading
- After Every New Win That Is Your New Base
- Dealing With Losses
- Dealing With Distractions
- Best Ways To Manage Risks
- The Number One Best Way – Staying out
- The Number Two Best Way – Placing Trades which are impossible to lose
- The Number Three Best Way – High Probability Trading
- The Number Four Best Way – Good Risk / Reward
- Thinking Deeply About Order Flow, Global Macro, and Correlations
- My Biggest Trading Edge
- Order Flow Quotes
- Order Flow Quotes II
- Order Flow Quotes III
- Order Flow Quotes IV
- Hedge Fund Mindset Mastery
- No Shortage of Money
- Seismic Differences Between Hedge Fund Managers and Retail Forex Traders Thinking
- Leverage Difference
- Expectations Difference
- Discipline Difference
- Stops Difference
- Liquidity Difference
- Inefficiencies Difference
- Pyramiding Difference
- Position Sizing Difference
- Examples of Big Hedge Fund Trades
- Order Flow Analysis Of Those Trades
- History of the Financial Crisis and Opportunities 2007 – 2010
- Global Macro Opportunities
- Finding New Inefficiencies
- How To
- Liquidity Considerations and scaling potential
- Stocks and Fundamental Value News Trades
- Being Extraordinary
- Extraordinary Example 1
- Default Thinking
- More Common Mistakes
- Always Exercises To Do
- The Best Questions To Ask
- Do This Now
- Parting Words
Need To Be Sorted
Need To Be Sorted II
4. What happens if the website gets shut down?