Still watching the euro

Since my last post, the euro has indeed put on an impressive rally back. People are doubling down on there shorts and just getting crushed. This momentum was really easy to feel in the ticks before the event. Still, I like to sit out counter rallies as a matter of safety -- it's way to easy to get caught in reversals and whipsaws. So what is the new trend for the euro this year? That anyone's guess -- as for me I'll just being watching and waiting for new trends. With statements like "low rates through 2014" from the Fed and Bernanke, the euro might not be the worst of the failing currencies in 2012 and could instead see us rally back towards 1.4X.

Some manual trading down the euro

While the breakout bot has been holding a ~1.33 EUR/USD short for almost a month now, I decided to get in on the action with a little manual trading of my own. I was inspired by my visit to Hungary and being on the ground in Europe again, I felt the urge to get in on the action. My trading coincided with the large downtrend starting right after the new year and ending only a few days ago. Oanda's new trailing stop feature came in very handy, and I must admit it was nice to trade from the UTC+1 timezone. The euro is now counter rallying and we'll see if indeed this short play is over and we'll tread water again, or if the 1.2X's are here to stay this year for the euro. Time will tell.

Thank you Mr. Trichet

So the past month has seen me busy with manual trading again. Since my last post about shorting the Euro, it has dropped 15 cents or so. I've been along for the ride at several points. This past week we finally saw the first real response from euro bulls to support the currency and keep it in the 1.2x range.

With that, I can say my account grew over 40% during the month of May. This is simply unbelievable, given my low leverage employed (typically 2:1 or 3:1). My post on profit and the mob seems to fit well here. The market participants agreed with my thoughts on the euro and became net sellers for the entire month.

By the way, my thoughts on the euro are less certain moving forward from here. Although I don't believe the sentiment has changed, it may very well have all been priced in at this point. If you'd like to venture a guess, open a position :-)

Slow ride down the Euro

So recently the Euro has been on a downward slide; perhaps spiral is the better term. Given the relative cost of holding short positions, it's been easier for me to open and close manual trades on the way down. It's unclear how long this new trend will last in EUR/USD, but in alot of ways it seems to be only building steam. The news of Europe being potentially bankrupt is just starting to float onto the forefront of news; something which folks like Mish have been pointing out for some time.

In other news, is the Australian dollar next on the list for falling out of favor with traders? Critics point to a still yet to pop housing bubble and the high interest rates in the wake of the endless deflation states of the United States and Japan. For now it seems, the commodity bubble is in full swing and that bodes well for the Aussie. It's rebounded nicely from the spring lows. I'll keep my eyes on the dollar, but if you curious at staying more in tune with AUD, check out Rookie Forex. He's been trading the currency for sometime and has strong longterm views and outlooks towards it.

Profit and the Mob

Profiting from a trade doesn't mean you are/were right; don't buy into this fallacy. It simply means others also traded the same way as you, during the same time you were vested. This brings up an odd perspective on the manual trader. There are traders who put in long₁ hours manually trading the news, or fundamentals. Many of these folks are your classic stock market gurus who form an opinion on a company or sector as a whole and trade that opinion in those instruments. Yet it appears their ability to generate a profit from these activities is simply because they think the same way as others do; aka they are part of the mob.

In other words, if we view an instrument in the market at any time, we can think of the price as a representation of a random₂ slice of people's opinions. The best traders are the ones who simply align themselves closest to the opinions of there peers within that instrument. Make sense?

Your paradox for the day - How can following the mob make you a profitable trader, when 95% of the mob loses money? It would seem the key to success in manual trading is to follow the mob, but be a mob leader.

1. If you trade the non-farm payrolls announcement exclusively, you only work 1 hour a month!
2. This is perhaps a topic for another post. However, market participants are not random. They certainly are not constant, but I think statistics are valid here for who is participating. For this reason, we can gain insight into who is making up our market, and according to my theory presented above, adopt their style of thinking for profit.

Of Capital

A couple of manual trades closed successfully shows me up a modest 4% this past month. Seems hard to justify the cash sitting in the bank with that kind of return.

At this point I suspect most readers are crunching the numbers and seeing a >50% annualized return as unobtainable, risky and foolish. However, I will kindly remind them (and myself!) of a few insights they may not realize.

In this case, it may very well be said investing such capital into any market, let alone forex is a huge risk, and is only attempted to the investors own peril. One does well to listen and think for themselves after receiving such a warning. The concept that money (in this case US dollars) sitting in a bank is safer than vested in the forex market. After all, banks have guarantees, known returns, etc. This is all well and good. Indeed, those telling me such things would never dream of investing in anything, barring perhaps the stock market ₁. To anyone in this position, I would challenge that they are invested, and in my opinion, invested poorly in the forex market! They are (and presumably have been for some time) sitting on a giant dollar long position. To anyone holding this position (myself included) the long term returns have been quite negative. Your getting poorer, even if the digits in the account are higher than 10 years ago. Trading in the forex market merely allows you to diversify and choose where to put your chips. Having such a huge (albeit unleveraged bet) is not a wise investment choice at all times.

Now to the original claim that a double digit return is risky, unobtainable and foolish. I am certainly not so foolish as to count on nor expect that kind of return. However, the market has given, and will likely continue to do so ₂, opportunities to achieve such returns. I can make informed investments, manage risk, and do everything "right" ₃ and still lose money. Oddly enough, the converse is also true. I can do everything "wrong" and still make money.


1. The stock market shall have to be dealt with in another post. For now, suffice to say there is reason why I call it the magical money tree. Not matter what the brochure the salesman shows you says, we're not all going to be millionaires in 30 years.

2. As long as humans are the source of the market, volatility will know no bounds.

3. The definitions of right and wrong here are dubious and relative. However, the arguments hold no matter the readers definition of proper investing.

Look Ma, I called a top!

While working on writing my robots, I decided to start playing with a long term concept of position building with a directional bias. Say that three times fast. Suffice to say my initial position did so well I closed it for a solid 3% gain. Whoops! There goes the long term experiment. Nothing like calling a top, and getting out on the intra-day bottom as well. My robot to trade this strategy is still in the testing phase, so I decided to take the profits off the table for today and let the robot do its job when the time comes.