Broker Selection

BarroMetrics Views: Broker Selection

One of the most important functions we have as traders is finding a broker that we can rely on and feel confident in: that we won’t lose our hard-earned if they close.

For retail traders, there are only two jurisdictions I like: Singapore and Switzerland.

  • Singapore because MAS has a sterling track record. In the collapse of MF Global (2011) and Refco (2005), not a single Singapore client lost money.
  • Switzerland because the Government guarantees deposits up to 100,000.00 CHF. The drawback in Switzerland is the only licensed broker I know of is Dukascopy. I’m told, by my students and friends, that small accounts experience unacceptable slippage on stop orders.

I am not commenting on London’s FCA registrations because I have no experience with them. In the US and Australia, clients of failing brokers have lost some or all of their deposits. It’s true that in these situations, the brokers had failed to place funds in segregated accounts, in breach of regulations (e.g. MF Global), but the net result is the clients lost money.

Here is a link to an excellent article by Forex Peace Army on the subject:

http://www.forexpeacearmy.com/community/threads/how-to-select-a-forex-broker.2333/

Self-Awareness & Trading

BarroMetrics Views: Self-Awareness & Trading

Read what passes for education, and you’ll see that it focuses on METHOD – find the ‘right method’, and your fortune is made. Unfortunately, nothing could be farther from the truth.

That’s not to say any old METHOD will do. Our Method must have a positive expectancy. But while METHOD is necessary, alone it is not sufficient. We need to have proper Money Management and the discipline to make the best decision possible in the circumstances. That said, it doesn’t mean our decisions will always be correct. They need only be correct enough of the time to give us a positive result.

Let me give you a concrete example of what I mean. First, some context.

Since late 2014, early 2015, I have adopted an early exit strategy during ‘ebb phases’.

The result has been beneficial. My average drawdown dropped to 3%, and max drawdown dropped from 28% to under 10%. Moreover, my annual ROI improved, with 2016 being my second best year since 1990.

This year, the results have not been great. For closed out positions, I should see around -3.8% for Jan and Feb. clearly I am in Ebb Phase.

I started today with two open FX positions, the AUDNZD and NZDJPY. Of the two, I was most confident that the NZDJPY would run to target at around 72 (Currently around 80.75)

But this morning, in the 290-min equivalent of a 5-day swing, a buy signal was triggered (Figure 1, green arrow). In turn, the buy triggered a liquidation of the short position.  I do plan to reenter the short position on a downside breakout below 80.44 or a rally to 84.40 to 83.50.

Here’s the thing: I was most reluctant to exit.

I had convinced myself that the trade was solid and we would see 72 at some point without first seeing 83. Confirmation bias raised its ugly head, and I was seeing all sort of reasons why the buy signal would prove incorrect.

I did exit where I had pre-planned if the buy signal was triggered.

It may well prove, with hindsight, that the profitable decision would have been to hold rather than exit. But, we don’t have hindsight. We merely have the info in front of us; we can only make the best decision we can in the circumstances, given our knowledge and skill.

Why am I making such a song and dance about this?

Because in my coaching, I see the students berate themselves for making decisions that was ‘wrong’ only in hindsight! Then, they make a decision that breaches their rules  – and that decision is made because of the what had happened on  the last trade – compounding their error. And they wonder why they are long-term unprofitable? (!!)

How about you? How self-aware are you? Does self-awareness help or hinder your trading?

FIGURE 1 NZDJPY 290-min

 

 

A Nervous S&P Trader

BarroMetrics Views:  A Nervous S&P Trader

Long and uncomfortable – two words that best describe me at the moment.

Why? The three attached charts tell the story.

Figure 1 is a weekly chart with 13-week swings (quarterly trend). Notice that the weekly ranges before the Trump breakout increased the average true range and volume. This led me to the conclusion that what we were seeing was a distribution pattern.

The Trump victory on 11/11/2016 saw an upside breakout. At the time, the question raised was whether we were seeing an unexpected (in which case a new uptrend had started) or a surprise event (in which case we’d see a rejection of the new highs and the start of bear).

The price action following 11/11/2016 (Figure 2) persuaded me that we had seen an unexpected event and that a new uptrend was in place. More, given that Trump’s policies were unlikely to deliver on his grandiose promises, the current uptrend could be classified as a bubble in the making.

What was it about the price action that led to this conclusion?

Well, two things:

  1. The shallowness of any sell-off, and
  2. The directional persistence following each pause. (Figure 2).

The reasons why I am ‘a nervous’ long is also shown in Figures 1 & 2. Notice that the Trump breakout is unaccompanied by a healthy increase in volume and range.

Figure 1 shows that we have seen this pattern before, the QE effect, especially the period 2012-11-16 to 2014-09-19. That was a two-year uptrend when the S&P ground up on below normal range and volume, increasing some 50.69% in the process.

My plan is to reduce position size and tighten my stops to manage my long trade. The last thing I want to be is lackadaisical and have Black Monday (1987-10-19) surprise me.

FIGURE 1 S&P Weekly

Figure 2 S&P Daily

The Art of Learning and Trading – The Journal

BarroMetrics Views: The Art of Learning and Trading – The Journal
In all the years as a trading coach, one of the most difficult ideas to get across and have the retail client execute is the keeping of trading journals – psych and equity. The second? Getting them to learn from their failures and successes.
Part of the issue was the format I was using – somewhat clunky, and many of the routines had to have separate entries. A new software has some out that does away with these difficulties.
Once setup, the trading journal outputs the stats we need as well as insights into our psychological behaviour. Let’s look at some of these:
  •  Its ‘Emotional Analytics’ function pinpoints the emotion/emotions affecting your trading results.
  • Its ‘Tilt Meter’ identifies the mistakes you are continually repeating.
  • The ‘what if’ (Alternative Strategies) shows you how your trades would face fared using different entry and trade management techniques.
  • It has all the stats we traders need, and the graphical displays are excellent.

That’s just a small sample of what Edgewonk does. The bottom line is you now have no excuse not to keep your journal and no excuse not to learn from it. Doing will improve your profitability.

Certainly, the designers have done all the can to make the software useful and supportive to the trader.  I like it so much that I’ll be bundling it with my courses. By the way, if you have taken any of my courses, and would like a copy, let me know. We managed to secure a 20% discount for bulk purchases.

I like it so much that I’ll be bundling it with my courses. By the way, if you have taken any of my courses, and would like a copy, let me know. We managed to secure a discount for bulk purchases. Note that this offer is available for past and present students only.

Opps I almost forgot. The current cost is USD 169.00 and the URL:

https://www.edgewonk.com/

The Art of Learning and Trading

BarroMetrics Views: The Art of Learning and Trading

“The key to pursuing excellence is to embrace an organic, long-term learning process, and not to live in a shell of static, safe mediocrity. Usually, growth comes at the expense of previous comfort or safety.”

“…..successful people shoot for the stars, put their hearts on the line in every battle, and ultimately discover that the lessons learned from the pursuit of excellence mean much more than the immediate trophies and glory. In the long run, painful losses may prove much more valuable than wins—those who are armed with a healthy attitude and can draw wisdom from every experience, “good” or “bad,” are the ones who make it down the road.” (Josh Waitzin ‘The Art of Learning’)

Two great quotes and both applicable to trading. In essence the first says to succeed, we need to move out of our comfort zones, and the second says success comes from learning from profitable and losing trades.

As my coaching expertise has grown over the years, I have found the truth of both statements prove itself time and again. Those who attain their trading goals are those who exhibit both qualities. Those who fail have usually been reluctant to engage in either.

But, let’s say you are willing, what actions do we need to take in pursuit of the improvement?

Well, my first bit of advice would be to get a trading coach…..

The second, acquire the habit of keeping an equity and psych journal, then acquire the habit of learning from your entries. Again, this is easier said than done; but, technology has come to our rescue.

More tomorrow…….

 

 

The Art Of Learning

BarroMetrics Views: The Art Of Learning

Josh Waitzkin’s bio makes for interesting reading (see http://www.joshwaitzkin.com/josh/): it’s not often Chess aligns with the Martial Arts. I came across him when I saw ‘Searching for Bobby Fisher‘ – great movie.  I’ll leave it to you to read the links.

Here I’d like to shine a light on Josh’s ideas on how to learn. Now, I have to say that I dislike the format of the book: combing through pages of personal anecdotes in search of nuggets of gold is not my idea of fun. Still, the effort was worthwhile.

Josh’s main messages – to learn:

  1. We start by integrating and internalizing the fundamentals seeking to understand the principles of our discipline.
  2. Fueled by our understanding and internalization, we increase our repertoire of techniques, choosing the ones that best suit are personality while maintaining contact with our central core.
  3. What results is a network of deeply internalized, interconnected knowledge.

His techniques:

  • Bite-sized steps and complexity. Start with the simple and move up in complexity as our knowledge grows.
  • Once we attain competence, we look to attain the desired results with less and less effort (what he calls making ‘smaller circles’.
  • We attain mastery through ‘presence in the now’, learning to stress and recover. Mastery he defines as one where our rigidity to the ‘dogmatic interpretation of principles’ is replaced by making decisions defined by current circumstances. We are ‘at peace with and navigating the tensions of competing truths, letting go of any notion of solidity’.
  • Finally, his learning model is akin to Deliberative Practice.

On Monday, I’ll look at Josh’s approach in relation to trading.

Trade The Price Structure

BarroMetrics Views: Trade The Price Structure

A friend of mine trades the markets on fundamental and is a very profitable trader.

Whenever we get together, the conversation invariably leads to the discussion: “all things being equal, which is the better approach”? Of course, the key words are: “all things being equal…”. Clearly, the best approach would be the one that best suits the trader’s personality.  But, putting that question aside?

The short answer is I don’t know.  What I do know is I’d probably be out or losing my shirt if I were using fundamentals.

There were three pieces of news out yesterday:

  • Positive for the stock market at least in the short-term, repeal of Dodd-Frank.
  • Negative:
  1. The report that the Trump team had been in contact with Russia during the elections. Bearing in mind that Russia did attempt to influence the elections in Trump’s favour, this has the potential of becoming a very serious problem for Trump.
  2. The fact that Chinese courts are now beginning to support Trump’s trademarks. This is important because Chinese courts are recognised as being an arm of Chinese policy (i.e. they are not independent). If that is the case, then it could be said that Trump is receiving a benefit from a foreign government – something expressly prohibited by the Consitution.

A case has been brought by some ethics experts and legal scholars, but it is thought the case will not succeed. (See The new lawsuit accusing Donald Trump of violating the Constitution, explained)

So, what did the stock market do? Rallied strongly. If ever we were looking for evidence of a bubble, last night’s price action was it. Repeal of Dodd-Franks opens the door to the sub-prime abuses especially since the repeal includes the Volker Rule (see If Trump repeals Dodd-Frank it would be a monumental mistake).

So for the moment, for US stocks, I’ll be adopting the strategy outlined in yesterday’s blog.

A Rally on a Whiff of a Prayer

BarroMetrics Views: A Rally on a Whiff of a Prayer

I’m long the S&P, but I have cut my position size to half and made sure my stops are in. The current uptrend in all timeframes (from 12-month to 1-day [yearly to daily]) leaves me very nervous.

Why?

First the technical picture. Figure 1 shows the quarterly trend from the sub-prime low in June 2009.  In that period, we saw two 13-week corrections – the price action marked by the green and red rectangles. I have also marked the Trump election win with a red time-price label (11/11/2016).

Figure 2 is a Daily chart starting from just before the Trump win to yesterday. What we see is the congestion period has a larger average range and average volume than the current trending period! Historically the current period has a range and volume that is less than normal. In the past, healthy impulse swings have had higher average ranges and volumes than congestion stages.

So that’s one reason why I am nervous. There’s another.

It seems to me that this rally is fuelled by a belief in the Trump miracle of making Amercian great again: he’s going to create new jobs, cut taxes, attain greater growth and balance the budget.

The problem is the way he is going about it – it looks to me that we’ll have the illusion rather than the reality. Take the current proposed Republican tax bill.

The Financial Times had an excellent piece in today’s paper: Taking Sides in the US Tax War (unfortunately I could not find a link to the piece). Essentially, the bill would cut personal and corporate tax and at the same time impose a 20% tariff on imported goods. In addition, it would end global US tax, taxing only profits and income generated in the US.

The result of the legislation is to pit the “the consumer companies against their industrial peers. Big exporters such as Dow Chemicals, General Electric, Boeing, Caterpillar and Pfizer have formed the American Made coalition to champion the House plan.” In short, its big business against the ‘little guy’ – the voter that swept Trump into office will again by left out in the cold.

Also. the Tax Foundation says the plan would increase the Federal debt over ten years by 2.4 T!!

My fear is when the stock market realizes what a house of cards Trump is selling, it will fold and fold quickly. So why am I long?

Assuming we are in a bubble in the making, one thing I have learned is bubbles tend to last a lot longer than most expect.

So, I’ll reduce position size, allow for a massively poor fill on my stops and hope (on a whiff and a prayer) that I’ll accumulate enough equity in the position so that even a massive drop will not deplete my capital.

FIGURE 1 S&P Weekly

 

FIGURE 2 S&P Daily

Financial Crisis – Lessons?

BarroMetrics Views: Financial Crisis – Lessons?

A few readers have written asking why my US long-term, fundamental, view is so pessimistic. Here’s why.

My view is defined by Austrian economics, the only economics, I believe, that explains the business cycle.

In summary, the Austrian view is when a government inflates the money supply, especially when the increase rises faster than the increases in goods and services, we see malinvestment. In the 21st century, this has taken the shape of a housing bubble that was followed by a stock market rise.  At some point, the malinvestment has to correct. That correction takes the form of a severe recession or depression. The longer the money supply was inflated, the more severe the recession.

The 2016 US deficit came in at USD 19.537B (see The Feds Borrow More than the Deficit; the site also shows the deficits since 2000). What has that brought?

Well, it brought the housing bubble and the 2007 crisis. And since 2007, it has provided a stock market rally that to date is the second longest in history.

But what about the economy?

Figure 1 shows the GDP number from Shadow Stats from 1984 to 2016. You see that since 2004, the US economy has not grown in real terms (it has remained below ‘0’ line). Also, despite the money thrown at it since 2007, both the official and Shadow Stats numbers have remained in a sideways mode.

Now since Trump’s election in Nov, the S&P doubled its increase from the beginning of the year – due perhaps to an increase in bullish sentiment.

But, I see little in Trump’s to suggest he’ll turn around the economy.

Sure, there are some great ideas, reduce Government red tape, adopt policies that will boost jobs, cut tax. On the other hand, we’ll see expenditure on the Wall and other infrastructural spendings; we’ll also see increased spending on the US armed forces. Moreover, the spending will come first, and I have doubts the budget for 2017 and beyond will balance, let alone make up for the accumulated deficits.

So, we will see a stock market crash and at least a severe recession at some point. The problem for the trader, that some point can a long time coming. In the meantime, for US equities and indexes, you need to be long or out of the market.

FIGURE 1 GDP Shadow Stats

Broker Going Under?

BarroMetrics Views: Broker Going Under?

On Monday, Feb 6, the news came out that the CFTC had fined FXCM USD7M and barred the broker from continuing business in the US. The CFTC alleged that FXCM had defrauded its retail FX clients by advertising itself as a ‘No Dealing Desk’.  The has paid the fine and settled charges with the CFTC.

Yesterday Gain Capital announced it had bought FXCM’s US client base.

So what now for FXCM non-US clients?

Finance Magnates provided an excellent analysis of FXCM’s situation in “Analysis: Is Leucadia Willing to save FXCM Again? What’s clear from the article is if I were an FXCM client, I’d be moving my funds to another broker.

Sure Leucadia could come to the rescue or FXCM may find a buyer for its ex-US operations. The average daily volume generated by US clients of FXCM was reported to be around USD 2.4 billion – not exactly chicken feed. Its other operations should at least match that sum.

On the other, if I had money with FXCM why run the risk? Better to be safe than sorry. Cut and run would be my motto.