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This is brilliant advice for traders. Get the bad news out fast, and get it all out. Don't allow your own worries about breaking bad news (or admitting that a trade has gone poorly) keep your from seeking out the advice and help of other traders who you trust. In the same way, if you've taken a massive or damaging loss, it's important to break the news quickly, honestly, and completely to all involved (this would include your spouse, for example).

If you've been reading about hedge funds in the last year, you have read about Brian Hunter's $6 Billion blow-up at Amaranth Advisors in 2006, or recent huge losses in Bear Stearns' hedge funds that invested in the subprime mortgage market. In both of these instances, and many others not mentioned, good analysis at the start, vigilant management throughout, and honest evaluation of the situation could have prevented (easily, really) these problems.

Continue reading "Deliver the Bad News Fast" »

Posted by Rob at 09:17 AM | Permalink | Comments (1) | TrackBacks (0) ..............................................................................................................................................

Spoken by Dr. Renata Felloni, in Luke Reinhart’s The Dice Man.

Continue reading "Obviously Prudent Investment Advice" »

Posted by Rob at 06:26 AM | Permalink | Comments (0) | TrackBacks (0) ..............................................................................................................................................

1. Raging Bull
2. Titanic

So you've got these hedge fund managers -- hundreds of them, sitting all over the place, on each other's laps, in the hallways, standing in the exit, hanging from the balconies, all so that they can get a view of the first movie. The movie house acts out of pure self interest and greed, and sells more tickets than it has seats. The more crowded the movie house becomes, the higher the price of admission.

During the intermission, someone yells 'fire!' from within the movie house. In fact, all they have to say is 'FFFF' -- just the sound of the first letter in the word fire, and all of the sudden, there is mass panic and everyone is heading for the door. Oh, I forgot to mention, there is only one exit out of the movie house, and it happens to be a hole the size of a warship porthole. And there is a Japanese banker standing at the exit, charging an exhorbitant fee just for the right to get out. He doesn't move aside when someone yells fire or any other word.

Every time someone yells fire, there is no way for everyone to get out. Pretty soon, the hedge fund managers realize that there really hasn't been any fire, just the false threat of one. So after a while, they stop panicking and they just get comfortable (as much as possible) so that they can enjoy the second feature.

They know the story of the Titanic. They know how it ends. But they stay anyway.

NOTE: Thanks to Commander Rob of the HMS Somerset for the 'FFFF'. And he's got a great blog.

Continue reading "The Carry Trade and the Movie House" »

Posted by Rob at 03:24 AM | Permalink | Comments (0) | TrackBacks (0) ..............................................................................................................................................

The hardest thing in the world for a discretionary trader to do (after learning to risk less) is find a balance between . following strict rules and following his instinct. Why? I think it's because he feels that if he strays away from a set of "rules," then he is bending rules that were meant to work. And if he sticks to the rules and fails to make a profit, he is upset because he sensed that something wasn't working but he didn't do anything about it. So he returns to changing the rules a bit, but he feels like he's out in the great wide open and floating aimlessly, without any solid rules.

In short, rules make the trader feel comfortable (not to mention able to hold the rules responsible for the losses, while giving credit for the wins to his instinct). But a lack of instinct or flexibility in applying the rules leads to enormous frustration when applying the rules robotically doesn't work.

The point here is that any discretionary trading system that you can learn (and there are hundreds freely available in books and on the Web ) is meant to be a framework from which a trader can start to form his own opinions. Such as:

1. Hey, the [insert name of trading strategy here ] is cool! I am going to use these basic rules as a starting point for my analysis.
2. But I don't like trading the strategy around newstime. But I do like trading the strategy on a particular currency pair, on a certain time frame, when these other conditions are also met. But I'm going to watch out for price patterns and make sure I'm not getting into the market when there is a "wild boar" candle pattern or some such thing.

The basic rules of the system thus become a starting point. And when you use the rules as a starting point, you start to learn how a currency pair behaves and operates when held up against a framework/set of indicators (rather than using the indicators as if they could predict every move).

Now that I've said all this, I want to ask you:

1. Do you feel that you are meant to be a mechanical trader or a discretionary trader? Does the thought of being a mechanical trader bore you to tears?

2. Do you feel that there is a set of indicators or method that bank traders or successful traders use, and if you could just learn it you would be successful too?

3. Do you feel that NOT having a strict set of rules would leave too much open to interpretation? If yes, would you be willing to sacrifice discretion in order to trade something strictly? Or is having flexibility that comes with a "framework" mentality really important to you, because you will have a sense of "involvement" in the trading decisions?

Continue reading "Technical Analysis as a Framework" »

Posted by Rob at 01:42 PM | Permalink | Comments (0) | TrackBacks (0) ..............................................................................................................................................

Everyone understands that that in the short run China's handling of its [dollar] reserves has been a convenience to the United States. By placing more than $1 trillion in U.S. stock and bond markets, it has propped up the U.S. economy. Asset prices are higher than they would be otherwise be; interest rates are lower ...

Everyone also understands that in the long run China must change this policy. Its own people need too many things -- schools, hospitals, railroads -- for it to keep sending its profits to America. It won't forever sink its savings into a currency, the dollar, virtually guaranteed to keep falling against the RMB. This year the central government created a commission to consider the right long-term use for China's reserves. No one expects the recommendation to be: Keep buying dollars.

What's amazing to me is that there is so much talk about this one issue -- China's reserves and its eventual diversification of those reserves -- without any real understanding (ability to predict) of what the heck is going to happen if and when this diversification occurs. Here are just a few scenarios:

1. The Dollar Vomits: In this scenario, the US dollar gets whacked big time because the Chinese call up Goldman, Bear, Morgan, and everyone else, and they start selling off their dollar-denominated assets. The classic law of supply and demand says that if someone wants to sell $1 trillion of anything on the world financial markets, that "anything" is going to dive in value. It's not just the fact that there will be a glut of dollars (thus they'll be valued lower), but it's also the fact that this massive sell-off triggers a wave of buying from other people who don't want to be the last sucker at the poker table.

2. The US Fed Raises Interest Rates: China starts selling, and in order to bolster demand for US debt, Bernanke & Co. raise interest rates to attract buyers. This increased interest rate means that US debt will pay attractive returns, and thus the US can still finance it's wild descent into debtors hell (so that the US government can do important things like study the effect of a vegetarian diet on hogs, study why criminals want to escape from jail, and send man back to the moon even though it's already been done).

These aren't the only two scenarios. But this post is already long and I'll continue it later.

I do want to mention that in either scenario, either #1 or #2, the US economy still goes into the toilet. Under #1, the dollar becomes worth less, and inflation skyrockets and families can't afford such luxuries as food and shelter; additionally, that family's retirement portfolio (US stocks) blows up. Under #2, increased interest rates halt the lending that spurs the economic development that we've seen so much of over the last few years.

Continue reading "China and the Dollar" »

Posted by Rob at 12:04 PM | Permalink | Comments (0) | TrackBacks (0) ..............................................................................................................................................

Continue reading "New S/R Trade Idea for GBP/USD" »

Posted by Rob at 02:05 PM | Permalink | Comments (0) | TrackBacks (0) ..............................................................................................................................................

So many retail traders are focused on what they will be able to buy once they start trading "big time." When I talk to them about trading for $1 per pip to start, and then working up from there, they are positively underwhelmed. Everything else I say is drowned out by the fear of not being able to get rich enough to live comfortably within a very short period of time.

The truth is that living comfortably isn't about all of those other things. It's about being comfortable living with less. It's about saving, not earning; about not risking rather than taking the big risk for the big score; it's about compounding gains over time rather than the lottery win. One of the best things a new trader can do for himself is to reduce his standard of living.

What is also fascinating to me is that by learning to compound gains over time, a trader becomes truly self-sufficient -- as opposed to hitting the jackpot on a single trade (which is not something easily replicated).

If you haven't seen the price and time curve that I did a while back, you might find it interesting. Click here to take a look.

Continue reading "Living Comfortably" »

Posted by Rob at 09:02 AM | Permalink | Comments (0) | TrackBacks (0) ..............................................................................................................................................

Continue reading "Your SOL Quotient: The New eBook" »

Posted by Rob at 05:48 PM | Permalink | Comments (0) | TrackBacks (0) ..............................................................................................................................................

Furthermore, many of the situations that presidents face are defined by uncertainty, rather than complexity.

This is true of traders as well. Highly intelligent people that i have worked with, often have a tendency to over-think a trading situation. They believe that trading is complex, which then leads them to create highly complex trading systems with endless parameters. In my experience, simple systems work better. When I have visited traders that work on Wall Street, I have found them to be highly disciplined, willing to take responsibility for their decisions, firm in their management of risk. But they don't care if they are viewed as the smartest people in the room. Being right to them, in other words, isn't as important as making money.

Continue reading "Do Intellingent People Trade Worse?" »

Posted by Rob at 07:20 AM | Permalink | Comments (0) | TrackBacks (0) ..............................................................................................................................................

Continue reading "New Trade Idea: CADJPY" »

Posted by Rob at 05:22 AM | Permalink | Comments (0) | TrackBacks (0) ..............................................................................................................................................

The word I am going to use describe this attitude towards trading is Franticism. Of course I had to make up that word, but I think it fits because it incorporates the word "Frantic" and "Ism". These traders are, in other words, frantically attempting to build capital. Here are some signs that you're talking to a Franticist Trader:

1. Double-Trouble. He wants to double his account or better in less than seven days.
2. Mistaking Desire for Success for Deserving Success. He says things like "Trading has to work. It just has to work." Or, "I really want trading to work out," as if wanting it alone was going to be enough to give them huge gains in a short period of time.
3. Avoidable Mistakes. He attempts to make trades without fully learning how his trading platform operates (the charts, the orders) and makes completely avoidable mistakes.
4. Reactive. He trades reactively -- a bad trade happens, he goes right back to the computer because now he "knows which way the market is really going," and doubles up on the trade size.
5. Lottery Mentality. He is unimpressed and uninterested in compounding as opposed to the big score (more on this later).
4. Franticide. Eventually, he commits Franticide, which is the act of blowing up one's account in frantic trading.

It's Sunday here, and perhaps on a traditionally religious day in the States, it's appropriate to ask: Are you a Franticist?

Continue reading "Franticism" »

Posted by Rob at 06:25 AM | Permalink | Comments (0) | TrackBacks (0) ..............................................................................................................................................

What I love about the post is in the very first paragraph. He comments on a contact he has, "The Dealer," and says this:

I like chatting with this guy. He never tells me market theories, but he will tell me what players are doing. Size, timing, targets and such. It's incredibly interesting information in its own right, regardless of my own market take.

It's one thing to have your own, well-studied opinions about the market. But theories only go so far. The other (major) question is always: what is actually happening? What is really going on?

Continue reading "Market Theory vs. Market Reality" »

Posted by Rob at 09:07 AM | Permalink | Comments (0) | TrackBacks (0) ..............................................................................................................................................

Nowadays, I am thrilled for Saturday. There isn't a thing I can do about my open trades. There isn't a chart that I can look at and plan anything that wasn't able to be planned yesterday. Stephen Covey, the self-help business author, recommends that you take some time to "Sharpen the Saw," or, in other words, get away from your business (trading) life, and get your mind and body in shape.

Saturday is a perfect day for that. Read a good book (not about trading). Spend time with your family. Wake up early and go for a walk. Clear your mind. Take a one-day sabbatical from the business of trading. You can find that you have breakthroughs and epiphanies about trading when you become deeply involved in something else.

Continue reading "Saturday is a Special Day" »

Posted by Rob at 06:05 AM | Permalink | Comments (0) | TrackBacks (0) ..............................................................................................................................................

There is all kinds of talk (and news reports, and windbag congressmen) who complain that "real" inflation is higher because our energy costs are skyrocketing. Putting aside for a moment that people in the US still pay less for gas than most people in the world, consider that the red line and the blue line on that chart are not really that far apart.

What does that mean?

It means that "real" inflation, which would include increases in food and energy costs, is not really too different than core inflation. It's another case of much-ado-about-nothing. The bigger story is, in my opinion, the story about what wages have been doing over this period of time.

Continue reading "The Food and Energy "Crisis"" »

Posted by Rob at 01:20 PM | Permalink | Comments (0) | TrackBacks (0) ..............................................................................................................................................

From 1991 through 2007, we've seen CPI bounce around between 4% and a bit more than 1%. That's 16 years and only for a very brief period of time (in recent years) did we see the range broken. Consider this for a moment: look at all the news stories, all the business television reporting hours, all the speculation, all the hullabaloo, the much-ado-about nothing...all in the name of predicting and hyping up the Consumer Price Index. Think of the money involved in just publishing to the world all of this "news".

Now think about all the billions, even trillions, of dollars traded back and forth solely on the basis of this one economic indicator which, in the end, hasn't moved outside of a narrow range for 16 years.

Trading is about stories. It's about belief systems and emotion and hype. It's not about rock-solid facts. All those billions of dollars won and lost on interest rate / inflation speculation, when in reality the real CPI hasn't moved much at all. It was a non-story, really, for the last 16 years. But this non-story can create and destroy billions of dollars in wealth.

NOTE: I understand that small fluctuations in interest rates cause interest-rate based financial products to move a lot. But think about why those products are moving -- they're moving because of the stories behind the market, the belief systems, the hype.

Continue reading "Little Bit of Inflation Goes a Long Way" »

Posted by Rob at 01:10 PM | Permalink | Comments (0) | TrackBacks (0) ..............................................................................................................................................

Anyway, this trader and friend got himself in the right frame of mind for trading and studying in the morning by cranking up the music -- it blares through his entire house. When I went to see him for a visit, Led Zeppelin was blasting over the speakers and I admit, it did set the energy level for the rest of the day. My friend writes, in the form of a goal:

I must create a routine to increase energy and become more receptive to creative impulses. Getting the Led out got me unexpectedly juiced up in the morning. This implies there are other useful actions to be discovered for inducing good vibrations.

Continue reading "Get the Led Out: Your Daily Routine" »

Posted by Rob at 07:09 AM | Permalink | Comments (1) | TrackBacks (0) ..............................................................................................................................................

Often traders in a profitable trade will:

1. Do a ton of analysis. They look at different time frame charts, or "correlated" currency pairs, or additional indicators.
2. Believe that an optimal exit rule can be written for most circumstances, so they do the analysis to find out which rule would be best. They end up writing me and say, "for this instance, I should have done X." But then a week later, they change the rule again because another trade comes along and they should have done Y.
3. When their analysis becomes too confusing (no clear answer), they start letting their winning trades stay open forever and often these trades become losers.

Going down this path may end up giving you 500 different rules for all kinds of situations. So my recommendation to you is that instead of trying to figure out specific rules to make sure that you "know how" to deal with every possible scenario of having a profitable trade, you might just want to stop yourself from over-analysis. When you are looking at an open trade, ask the following questions:

1. Would I be happy to take the profit that I have now?
2. If I don't close this trade, what are the risks?
3. How much of the profit am I willing to give back in order to try for more?
4. If I don't know what is going to happen next, or if I'm obsessing about it, why not just close the trade?
5. What is my goal with this trade? A profitable trade? A certain dollar amount gained? A certain number of pips? Was one of my goals to make sure I risked as little as possible?
6. Have I gained more than I originally risked (what many call "better than 1 to 1")?

The last question is essential. Often we'll feel tempted to close a winning trade because we need the psychological boost that comes from a winner. But we close it with just a few pips (and we say that next time we'll let it ride). This is just another example of not really having a plan, or any type of exit strategy when the trade is taken. This type of trade exit might make you feel better but it places you on the road to ruin because you're simply proving that the minute something good happens to you (a profitable trade) you are so incredulous about your skills that you close the trade and end up with a terrible SOL Quotient.

Continue reading "The Paralysis of Analysis: Profitable Trades" »

Posted by Rob at 05:43 AM | Permalink | Comments (0) | TrackBacks (0) ..............................................................................................................................................

1. Carry Trade Definition. This is an article from Investopedia that really lays it out simply.

2. US Stocks and the Carry Trade. How they are (and are not) correlated. One of Boris Schlossberg's finest articles.

3. Wikipedia on the Carry Trade. Another great basic overview.

4. The Trade of the Decade. I don't know Nick from a sack of coal, I have never met him and I am not familiar with anything that he sells, teaches, or sends out. But I do like what he wrote in this article (especially about how big the carry trade might be).

Continue reading "Carry Trade Resources 101" »

Posted by Rob at 09:53 PM | Permalink | Comments (0) | TrackBacks (0) ..............................................................................................................................................

1. A political issue (ratification of the Euro Constitution);
2. An economic issue (the carry trade);
3. A global stability issue (Iraq war);

And then runs with it. A matter as simple as US bonds having a bad day (or couple of days) can spring to life a thousand news stories simultaneously and then, all of the sudden, the theme has been born and it grows into a beast so strong that no trader can avoid thinking about it. Well, that's what is happening right now with US bond yields.

The bond yield matter is connected to the carry trade, which is connected to currency rates, which is connected to you. And as long as traders believe it's important, you're going to see the issue become a self-fulfilling prophecy. To boil it down to the simplest possible:

1. Investors are now worried that US interest rates are going to rise (esp. the 10 year treasury note). 2. This is causing disruption in the US equities markets. 3. This is causing news stories about both of the above, and a TON of speculation about what will happen next.

What I really want to say is that these self-perpetuating stories just take on a life of their own, and they become dominant themes because a mass of people all latch on. Traders want something to focus on -- a story, a theme, a reason for their trading -- and they'll let just about anything remotely reasonable fill the space. I'm not saying that traders are irrational, but I am saying that often they need a story or a reason in order to justify what they want to do or what they were going to do anyway.

And sometimes, they are irrational, and we start to see movement in the markets (notably, the currency markets) that just doesn't seem to make sense. Take, for instance, the recent plunge in the GBP/JPY from June 5th to the 8th. Everyone heading for the door on the carry trade, but why? The stories about the decline of the carry trade. Interest rates in the UK and in Japan didn't change at all during that period. But perceptions about what interest rates would do later this year caused a temporary panic.

In short, we're going to see a lot more of this over the course of the next few months. No one wants to be the last one out of the carry trade (they will lose so much in pip losses that they will end up negative on their trades, even counting the interest they've made).

Continue reading "Flavor of the Week: Bond Yields" »

Posted by Rob at 09:28 PM | Permalink | Comments (0) | TrackBacks (0) ..............................................................................................................................................

That chart comes from the awesome Briefing.com Website.

But now the Wall Street Journal is reporting that Macy's was going to build 3,000 square foot "mock homes" inside some of their department stores, to showcase Martha Stewart products. That plan is scrapped, as the US mock-home sales have apparently eased off. Or the US mock-home buyer is having trouble getting a mock-home loan.

If there's any sign that the housing market was a bit on the bubble-side, this would be it.

The story about the mock-homes was brought to my attention when reading the always-informative MarketBeat blog from David Gaffen of the Wall Street Journal. In my opinion, that blog is worth the price of getting an online subscription to the journal. You can click here to read that blog:

http://blogs.wsj.com/marketbeat/

Now, how do we bring this full circle and apply it to the currency markets? I think that we've got a couple of things going on right now that are going to affect the US Dollar:

1. The US Economy is slowing down.
2. US Inflation isn't necessarily tamed.

If rates continue to rise (and there is now nearly no chance that the Fed will cut rates in 2007, and may even have to raise rates. Maybe I'm in the minority in suggesting this, but inflation hasn't been beaten yet. Even if the economy is slowing. Check out the PCE Deflator, which is the Fed's preferred measure of inflation:

Just look at the part of the curve from January 2003 to the present. It's not falling; it's obviously rising. In fact, it's coming up off a bottom from January 1999.

If rates continue to rise, even one more time, then the US Economy is going to take a fairly large hit. I suspect the Dow would fall far enough to eliminate any gains this year. It would put a lot of focus on the carry trade again -- especially if US rates are up (or staying up) while JPY rates continue to stay low and hold firm.

Continue reading "Even the Mock Housing Market Stinks" »

Posted by Rob at 10:06 AM | Permalink | Comments (0) | TrackBacks (0) ..............................................................................................................................................

http://www.mcginley.biz/

http://www.forexproject.com/

Those are just two and I'll update a few others in the coming days. Rich (forex project) did a cool contest recently where he rewarded the winners with Amazon.com gift certificates.

Continue reading "Blogs Worth Reading" »

Posted by Rob at 09:42 AM | Permalink | Comments (0) | TrackBacks (0) ..............................................................................................................................................