The market is still thrashing around, searching for direction, and after a week of seemingly endless comments from various officials, all pulling us one way then the other, it might be nice to sit back and review the nature of this type of trading environment. The kind of days we are seeing recently are potentially profitable and lively enough for spot traders – enough movement in enough currency pairs – but destructive for model based funds. When as a spot trader you get in the swing with a currency pair, on choppy days it is great, but when you start to get on the wrong side, it just feels as if the world is against you – better then to just sit back and walk away for a couple of hours. On bad days, I remember the ridiculous feeling that everybody knew my position! Every time I struggled into a trade and it approached the level at which I was about to take some profit, sure enough it reversed, but with seemingly double the momentum! Reading some of your comments recently, it seems as if I was not alone.
What I was experiencing of course was normal. If my trading was generally in line with others, then of course, as my profit level approached, others sold before me, and too many traders after one price meant an increase in short term velocity against me. Once I understood that this style of trading actually had very little to do with my view about the relative merits of two economies, but everything to do with the positioning of the market and the evidence of momentum, things got a touch easier!
You will be pleased to hear that the paranoia that one inevitably feels is also shared in hedge funds. We had a suite of long and short term models that traded mostly from behavioural analysis of pricing, and they traded at specific times of the day. Our fear was that if we executed through one source alone, someone could `reverse engineer` the rationale on which a particular model traded – as it turned out, this was not an unreasonable premise!
Moving swiftly on……no matter what basis a model has, most only make money when a `trend` is established. One of our objectives was to build short term models that redefined a trend as perhaps 1 hour, rather than 1 year, and build a trading strategy round that – all interesting stuff; and that`s before you start to build a portfolio of these models that actually work well together without all being the same way at the same time, thereby exaggerating risk way beyond their individual parameters!
So my point here is to say that these sort of markets are pretty tough both for the funds, always looking for the breakout and getting whipsawed too often for comfort, and for day traders looking to get on the right side of momentum. The idea also, that models in FX are somehow the way to go – even for individuals – is open to debate. The difficulty one has, when the idea and testing of a thesis is proven to work, is the ability to stay with that model when it starts to go out of phase. What we tried to do was stick with the proven characteristics of the model, but try and build other models that operated on a basis that compensated for that out of phase development of model 1!
So by all means, go get an idea behind a strategy, test it on as many currency pairs as you can (just don`t make it based on when moving averages cross ….sooooo 90`s!), back test the idea – and don`t cheat – and if it looks promising, work out the volatility of its performance. If you find that its down periods are in line with your risk tolerance levels, or that by adding a small filter, you can make that happen, then the yours is the earth and everything in it, and you will truly be King of the Swingers, an FX VIP.
Good luck, and have a great weekend.