Slow Trader

Author: Buzz Lightyear

  • Risky

    Readers will know that our chosen trade method is day trading a currency pairing.

    People that are not familiar with how we go about our business will think ‘gosh, that’s risky’. And of course, to a large extent, they are right.

    As with many disciplines that require a great deal of skill and practise (to simply achieve mediocrity), it comes across as risky because most don’t take the time and effort to learn.

    Ironically a principal draw for us to day-trading is the control of risk.

    Our e-book on the subject to be released within the first quarter of next year shows, we think, in some detail how this is possible.

    Day trading, if done well and with practice, can provide a consistent daily or weekly return. So unlike other more traditional trade or investment methods.

    With all worthwhile disciplines, it does not come to us overnight.

    As Seth Godin said:

    “The hard part is ‘steady.’

    Anyone can go slow. It takes a special kind of commitment to do it steadily, drip after drip until you get to where you’re going.”

  • The NASA effect

    From mid-January, James and I will again trade together, full-time. His contribution is to: (1) reduce mistakes made and (2) maintain our focus.

    Of course, there is more to it than that. Each trader has to similarly trade competent and knowledgeable. When that comes together, however, trading together really helps.

    Mistakes:

    In the pilot world, it is known as crew resource management or CRM. During the late 50’s too many Comet aircraft were crashing and too many of those were due to pilot (or crew) error.

    NASA had a look and devised CRM; its success, throughout aviation’s history since then and the space program, was staggering. CRM is a method that prevents egotism.

    The movie ‘Sully’ quietly shows CRM in operation. Each move by either the captain or the co-pilot is confirmed and checked by the other. It’s an accepted way in the aviation world.

    So much so that it has made its way, under different names, into the hospital operating theatre.

    Concentration

    Distractions clearly affect performance on the job. In a recent essay, Dan Nixon of the Bank of England pointed to a mass of compelling evidence where constant interruptions accustom (us) to distraction, teaching us, in effect, to lose focus and seek diversions:

    Conducting tasks while receiving e-mails and phone calls reduces IQ by about ten points relative to working in uninterrupted quiet.

    That is equivalent to losing a night’s sleep and twice as debilitating as using marijuana.

    By one estimate, Nixon says it takes nearly half an hour to recover focus fully on the task at hand after an interruption.

    The day-traders world (not as dramatic as aviation – our feet are on the ground for a start) very much demands our total attention.

  • Margin, a big deal?

    Margin, or deposit requirement, in financial trading, is the good faith amount that we need in our trade account to cover a deal. The margin is not a loan, but rather a means to cover a loss.

    If we wanted to purchase a stock or share from a traditional broker, and the value of that purchase is £5,000, then we’d need £5,000 available in our account to complete the deal.

    A financial spread bet, or derivative based account, is a leveraged account and only a ‘margin’ of the full-trade amount is needed.

    Take Sterling versus the dollar for example, a trade of £5 per pip, at the current value of this market, without a leveraged account, would cost £67,500.

    However, we are only required to cover the broker’s margin.

    (A margin rate of: 0.5% to 1.5% is common in FOREX and 5% in stocks and shares; but each of these can vary significantly if a market becomes non-liquid or volatile)

    A margin rate of say 1% would require an account to hold £675 for the £5 per pip example.

    £5 x 13500 x 1% = £675 margin (This is a non-stop calculation, a with-stop calculation reduces the amount)

    If the trade goes against us, however, the margin requirement increases. Therefore, a good amount more than £675 is required to comfortably cover the trade.

    It is easy to see how novice traders could get into financial trouble if they lose sight of the overall risk of such trades.

    Probably why margin rates are on the increase to retail traders.

  • The Long, the Medium and the Short

    There are many different views, for lots of good reasons, as to what defines a trade period. But let’s try this:

    Day trading, as the word suggests, is a trade that is entered and exited within the same day. Mostly this will be technical trading, but could be news or event based.

    Short-term trading is again primarily technical; but could include fundamental, news and event based criteria. Usually one day out to several months.

    Medium term could be 9 months (as defined by Peter Lynch as the period beyond which fundamental information provides all the influence) out to several years.

    Between medium term and long-term we see a gap. A sort of no man’s (or women’s) land.

    A large correction, substantial pull-back or crash (call it what you will) happens between 7 and 15 years. Historically not before 7 years, but could be more than 15 years.

    So, lets take 15 years as a guide. For our ‘long term’ investments to survive, to grow, they may have to outlast a couple of crashes. That takes the longer term to 30 years, or thereabouts, depending on the date of purchase of the investment relative to a previous crash.

    It makes sense therefore that investment money that is needed for a pension ought not to be invested over the medium term some 7 to 15 years from a previous crash.

    2008 was our last crash, so between 2015 and 2023, or until the next one, it might be prudent to only invest short-term or longer term.

    And, we would say long-term only with excellent value equities probably purchased prior to 2015.

  • The super tanker of markets

    Can we move the market? Possibly, certain markets. But we want to trade a market that has particularly high liquidity. In other words, the ability to buy and sell an asset easily and quickly.

    We trade major currency pairings for this reason. But how big is the currency pairing that we trade, and can we influence it a bit?

    If we consider the market we trade as the biggest super tanker – the one that is more than four football pitches set end to end – then to move this super tanker the retail trader is as if spitting (horrible habit) at the hull.

    Ah, but now we are a professional trader surely we have more influence at the level we trade. Yes, we do, we now don’t spit too often, we have graduated to a feather duster.

    To move our chosen currency pairing market, (particularly during the period of the Frankfurt, London and New York trade times where several trillion are traded daily) there are probably millions of spitters, many thousand feather duster types and everything in between right up to dozens of tug boats.

    The tugs, in this analogy, represent the financial institutions – banks, pension funds, big hedge funds and the like. A few tugs need to push or pull in the same direction to move the market.

    Our job is to determine, before hand, which way.

  • Can a trader swim?

    I remember reading ‘Total Immersion’ by Terry Laughlin some years ago.

    Good over short distances, personally I had trouble maintaining swim pace anything over a couple of pool lengths.

    I was looking for swim inspiration and feel that I probably got something else. My swim result, although improved, is still poor but I was fascinated by Laughlin’s philosophy.

    He had phrases such as ‘worry less about the power of your engine, and more about the sleekness of your fuselage’.

    And,…. ‘aim to glide through the water, concentrating on balance, fluidity and relaxation, delaying exhaustion by using just the muscles you need, and only when you need them’.

    But it was his reference to Kaizan that caught my attention. The secret, laughlin reckoned, was the Kaizen principles at the heart of Japanese manufacturing: continuous incremental improvement ‘through cleverness, patience and diligence’.

    ………and then the achievement of ‘unconscious competence’.

    That is a state I’d like to achieve in my approach to trades.

    Terry Laughlin, a swimming coach, author, died on October 20th, aged 66.

  • Margin to increase for retail traders

    We have been awarded professional client status by our brokerage.

    To be classified as a professional client the qualification is 2 out of the following 3 statements below:

    1. Carried out CFD, spread betting or forex, in signicant size, at an average frequency of 10 per quarter over the previous four quarters
    2. An investment portfolio (including cash deposits and financial instruments) exceeding €500,000
    3. Work or have worked in the financial sector for at least one year in a professional position, which requires knowledge of CFDs, spread betting or forex

    Why is professional client status a big deal? Because margin requirements will increase substantially for ‘retail traders’; for professional clients they will not.

    What is ‘margin’?

    • It is a good faith deposit that a trader puts up for collateral to hold open a position.
    • It is not a transaction cost, but a portion of our account equity set aside and allocated as a margin deposit.
    • When trading with margin the amount of margin needed to hold open a position is determined by trade size. As trade size increases, margin requirement increases.

    This has no effect, however, on our usual spread payment: which we consider as a true identification of a retail trader. If we pay a standard spread then by definition we are retail traders.

    Institutional proprietary traders (or ‘prop’ traders as they are known) trade the firms money (not clients money) and often at a reduced spread cost, or no cost at all. They are, to our mind, non-retail traders.

    But to be considered a professional client, and thereby maintain a desirable margin commitment, is great.

  • Do we trade the news?

    Finding the right currency pair to trade is key to success. We want steady movement of price but not unpredictability or undue volatility.

    We also don’t want to move between currencies too often because, as a short-term trader, we get familiar with the flow (the news) of the currency.

    We traded GBP/USD up until Brexit and then moved to USD/JPY. Since the recent North Korean influence we moved back to GBP.

    In what detail do we follow the news of a currency? here’s an overview:

    • Since November 2015 the pound (GBP) has depreciated by over 15% against other currencies, mainly because of worries caused by last year’s Brexit referendum.
    • As the cost of imports has risen, inflation has jumped.
    • At the last release, Consumer-price inflation (CPI) was 3%, the joint-highest level since 2012.
    • But inflation may soon be on its way down again.
    • The annual rate of CPI has averaged almost exactly 2%, in line with the bank’s target.
    • Of note, as an open economy with a fairly volatile currency, GBP is prone to short-term spikes in inflation.
    • The effect of the GBP plunge last year will, it is considered by reports, soon fade.
    • Import prices will therefore not continue to rise sharply.
    • There has been a close correlation between movements in sterling and the “core” rate of inflation (a measure which excludes the most volatile components). If that correlation continues, then within a few months, reports suggest, the headline rate of inflation should near 2%, assuming sterling holds steady.
    • But the pound suffers whenever there is bad news about Brexit, and there is a fair chance that the months ahead will contain plenty of that.
    • But for now, at least, inflation looks more likely to fall than to rise much further.

    News is the first consideration on our pre-trade list. For a news release that we consider could provide volatility or unpredictability we are trade ‘flat’ a few minutes before release of the news, and usually much earlier than that.

    We have an awareness of the news and importantly the possible volatility a certain news release can provide.

    But we do not:

    1. second guess the effect of a news release, or
    2. trade with a certain trade direction in mind due to news or fundamental considerations.

  • The least dirty shirt on offer

    An article featured in this weeks “The Economist” is about the cyclically adjusted earnings ratio, (CAPE) as calculated by Robert Shiller of Yale University.

    The CAPE averages profits over ten years and is now used by many as an important valuation indicator. The article explains that currently the indicator shows that American shares have hitherto been more highly valued only in 1929 and the late 1990s, periods that were followed by big crashes.

    But the article is also balanced in explaining that CAPE valuations are for the longer term view; and that over-value can exist for quite some time.

    The CAPE is a similar method developed by Nick and me in 2010 on individual equities. More recently however we have not traded with this method due to there being few suitable valuations on offer.

    The CAPE is for the long-term but it is, of course, advantageous to purchase, even for the longer term, at particularly good value.

    The article concludes with fund managers being nervous about equity valuations but they (fund managers) find government bonds deeply unattractive. They are therefore  stuck with the stock market as the “least dirty shirt” on offer.

  • Trade entries

    Trade entries entered the most are:

    (1) On-limit entry trades that don’t activate, lead the way; this means we did not get the price we were prepared to pay for the trade. And that’s fine. (on-stop entries are not part of our strategy)

    (2) Next, with a similar number, are break even or near breakeven trades; usually these are trades that did not provide the follow through we anticipated. A difficult area of a trade and a clear strategy statistically works best here.

    (3) Further down the score are trades that make target.

    (4) Those trades that are profitable but are exited before target due to price action, rather than nerves, are similar in number to those that hit target.

    (5) Trades that hit stop or are exited early due to price action are fewer than those that hit target, thank goodness! (importantly, these trades are smaller than the target hit trades)

    (6) However, the big leveler on trade entries, and the difference between a consistently profitable trader and everyone else is limiting, zero would be nice, the amount of batty entries. By batty we refer to ego or tired entries, but more often than not they are miss read market reversal entries; a low risk, low probability trade that invariably ends up being vastly more expensive than anticipated.

    The simple conclusion is: read the market cycle and price action and stop batty entries.

  • One strategy at a time

    Patience is a virtue, is a phrase that is true in trading.

    Trader seminars often provide many strategies based around a trading method. An attendee then looks for a trade, from all of the strategies provided, all of the time.

    A recipe for a series of stressful losses.

    From all of the strategies taught at the seminar, probably only a few are worth the risk; and of those a single strategy might stand out.

    It is better to find that ‘one’ strategy and work it until we’re consistently profitable.

    Only then are we to consider another strategy.

  • Conflicting emotions – from notepad mistakes

    We always see opportunities to exit a trade before target.

    We see that we’re ‘in the money’ and worry that a reversal will take our gain away.

    So, we exit early, grab what we can and then justify that to ourselves.

    On the other hand, if we are out of the money, we more often than not hold until our stop is hit (to exit early is an acceptance of any loss against us and we are in hope that a reversal of price will minimise that loss).

    That is our nature, but makes for a poor strategy.

    We need to reverse this tendency and help to balance the equation.

    We need to discipline ourselves to: (1) hold until target and (2) exit a losing trade early if probability favours the stop being hit.

    Sounds easy, but probably one of the hardest things for a day trader to do.

  • Introduction to ‘notepad mistakes’

    As a continuance of my post on ‘learning from mistakes’ I thought that I ought to share some of the mistakes I’ve made (and occasionally continue to make).

    We pay a lot of money for our mistakes, so we may as well learn as much as we can from them. I would like to think that ‘once’ for each mistake would be sufficient, but no, daft as it seems, I can make similar mistakes many times over.

    The best way for me to learn was to write out the mistake, and lesson it provided, in a note pad. At least that way I’m acknowledging and taking responsibility for the mistake and, hopefully, I will refrain from repeats.

    Such posts will be called ‘note book mistakes’. There may be some lessons here for others (albeit I wouldn’t expect the Slow Trader fund investors to gain solace).

    The mistakes are based on short-term trading with a price action bias. However, they are broad in context and may apply equally to any trade duration or system.

  • “We seem to be living in the riskiest moment of our lives”

    Richard Thaler, a behavioural economist, received a Nobel prize. Speaking by phone on Bloomberg TV, he said:

    “We seem to be living in the riskiest moment of our lives, and yet the stock market seems to be napping, I admit to not understanding it.”

    From our fund point of view, we have a couple of lightly traded shares awaiting conclusion, otherwise we are 100% short-term (both long and short) trading of a chosen currency pairing.

    We have traded GBP/JPY, changed to USD/JPY and currently we trade GBP/USD. Another consideration for us is AUD/USD.

    We moved from GBP during Brexit and for the months after.  With regard to price, JPY is consistent, a requirement of our strategy; unexpected volatility is not, therefore the decision, for the time being, to move back to GBP.

    We do not hold overnight, so poor liquidity during this period, and an increased probability in a spike in price, is not a consideration.

    Trading equities can be very different to currencies, specialization is appropriate.