Archive for July, 2009
Interview with Tom Yeomans
Tom Yeomans is a trader based in Canada who has made a big impact to the forex community by teaching methods to profit from the market based on what really moves markets- fundamentals. Tom demonstrated his expertise in markets and ability to teach others by putting his reputation on the line everyday in live trading rooms of over five hundred people. He now runs a website, tradetime.ca, featuring both educational materials for trading forex as well as institutional-caliber currency analysis software. After chatting with him last month I jotted down a few notes and posted an excerpt below. I hope you enjoy it.
What was your strategy and at what point did you realize you were profitable due to having an edge as opposed to luck? Alternate: How did you develop your edge over time to profit from the markets?
[When I first started out] I lost about $6,000 and replenished my account a few times and then started paying attention: I used to get wiped out around 08:30 NY time, and I thought, “what is this?” At that time, no one was looking at economic reports and news trading, and stuff. This was in 2004/2005 and for some reason, forex being a newly established market, no one else paid attention and that became my niche. I spent the next three years going intensely into all the economic reports that were being released. What would happen? What were the trigger points for when they would take off? I would sit there and I would stun audiences of up to 500 traders in the morning. We would get numbers directly from the data stream. Jobs numbers- terrible – BOOM! And the US Dollar would sink. It worked until it got phased out by the brokers. It was wonderful because a lot of people were [earning] a lot of money but I left about a year or two before everyone else left [when the edge started to disappear]. [After that] I started looking at the S&P and the Dow and listened to the audio pit noise from the CME, and we’d make trades with the pit noise. We made a lot of money doing that. Finally that started to fade away [also] with this economic situation coming in last year so I got away from that, so I’ve been strength trading on currencies.
Most people hold the view that “the trend is your friend,” and they see EUR/USD going up so they just buy using their technical indicators. What’s wrong with this? (Hinting at the necessity to view individual currency strength)
Technical analysis seems to be a beginner’s answer to having to actually sit down and learn what it is they’re doing. It’s a lot easier to just get some bogus technical indicator like MACD or RSI or blah, blah, blah. All these technical tools were transferred from the stock industry where they didn’t work anymore either. Technical analysis has its place, but it’s not the end all and be all, and it can’t replace knowledge. A lot of times in the morning I can make trades just based purely on what I see and what I’m hearing on the news. I don’t use candles or anything other than moving averages which gives me an idea of what’s going on and where [price] has been. That’s me personally. There are other very successful traders that use technical analysis.
Right and one of the things I’ve noticed about technical analysis is that it can actually appear plausible and easy to trade because it looks great in hindsight but it’s difficult to tell which patterns and indicators give signals that are based on randomness and which actually have some meaning (i.e. patterns representing market psychology). It brings me back to a quote I read in the Zurich Axioms, [edited: "Chaos is not dangerous until it begins to look orderly."]
(laughs). Well, all trading is the same in that it’s a gambler’s industry and most people lose. Most people use technical analysis, and there you are. I think what you need is experience and unfortunately there’s no way to get to it except through experience. Most traders fail within ninety days. If you can get through for a year or so and keep yourself going you can eventually get some experience. And after a while you just know.
Let’s talk about currency correlations. How can this be used to the investor’s advantage?
I’m actually writing a book about correlations, but it probably won’t be out until next year. I watch the Dow and the S&P to get a signal [noting] when the US Dollar is weak or strong. I often [even] see moves in the currency market that are later reflected in those. I often will see movements in the currency markets that are later reflected in other currencies. I’ll watch gold, silver, oil, the Dow Jones, and the S&P 500 to see what’s going on. I recommend just watching these on an intraday scale. Sit there for a few days or even weeks on Metatraderar and you’ll see [the way] they start to move. I invented and have used a currency strength meter since four years ago. I’m surprised not all traders are using it. It doesn’t make sense to me how someone can be in the foreign exchange business and not know whether the Dollar or the Swiss is strong. You don’t just look at one chart. That will only tell you what [single] currency it’s strong or weak against. You have to look at a whole range of charts to find out [its individual strength]. Say I want to find out whether the US Dollar is strong or weak. Well I have to open up 12 or 13 charts to take a look. And that’s why I invented the meter. If I were to make a trade on the strength of the US Dollar that morning I’d better be sure that it had been strengthening according to [all] the other currencies.
As the market becomes more efficient, where do you see edges coming from in the future?
Right at this moment the edge that is working [for me] is getting leverage down [because times are so volatile] and going for the longer term in the day. Once you get the 8:30 reports out of the way you look at the trend for the morning and say, the US Dollar (as a single unit) has been strong all the morning. Unless that report says something that says that shouldn’t be, it should continue on that day. But I’m like you and I believe the trend is not necessarily you’re friend. But here’s something you never hear about: Currencies trend. Pairs don’t trend. If you look at various economic reasons for why a currency is priced a certain way then you become a better trader.
If you would like to get in contact with Tom Yeomans or learn more about his educational materials or Currency Strength Meter, please visit his site at tradetime.ca or read his blog at tomyeomans.livejournal.com
Interview with Capricorn CIO/Trader Mikkel Thorup
I had the priviledge of getting to chat with Capricorn Advisory Mgmt. CIO/Head Trader Mikkel Thorup a few weeks ago. Mikkel is a professional with over 15 years of experience in the financial markets. His experience as a trader on the Prop Desk of Smith Barney eventually led him to form the Capricorn Group where he is now CIO and head trader. His excellent performance in his new Capricorn FXG10 Segregated Portfolio has attracted a nomination from the Hedge Funds Review 2009 European Performance Award. I found Mikkel to be a rather pleasant person to speak with and was open to sharing his insights. This post contains an exceprt from our interview and focuses on market dynamics and the carry trade.
You once said, “The human brain is far superior to a computer,” in reference to trading. But doesn’t it become difficult to make discretionary calls with so much information available?
Yes. We as a company look at more systematic strategies as well, but I believe that [having] long time experience in the markets is a big plus for making trading decisions. You can use your discretion to keep yourself away from getting into too much trouble when you see excess volatility in the market. In [such an] environment an algorithmic trading system would have difficulty because [it] usually takes a while to adjust to a new type of market environment. We may say that the market is going to go up based on a technical perspective, but there is far too much volatility that we have protect the cash of our investors so we would use discretion to also cancel out a trade.
How do you deal with the short term noise of the market, considering that you have some short term strategies in addition to medium term ones?
The main noise (randomness) in the markets is around the fundamental releases. We try not to have positions around key economic events. In principal the only way we look at these economical events are by knowing when that they are and having a filter saying that FOMC meetings, ECB meetings, and NFP are important, etc. We tend to be neutral around these events.
The carry trade has been a controversial strategy that tends to polarize opinions. Some traders and managers would argue that there is little or no alpha to be extracted from carry trades, because they claim that returns are mostly based on taking on risk rather than buying value, while others maintain that the market overprices risk premium in high interest rate currencies so there is an opportunity to take advantage of mispriced rates. Do you agree or disagree?
Are we trying to buy value in the markets? I wouldn’t really say yes. We are not philanthropists here trying to make things better for developing markets-we’re trying to make returns. I think carry currencies are still a very good source of alpha if you try to do it smartly. The way we try to deal with it is by focusing on the traditional G-10 currencies such as the Australian and New Zealand Dollar primarily against the USD (for today anyway) and JPY. Technical analysis is our entry [method] for these type of trades and we are long carry only. And we use options to hedge out our currency exposure. There’s been plenty of opportunities to extract alpha out of being long carry trades even though they have been actually going down because there has been a lot of risk unwinding. As long as you can protect your downside in some sort of way so that you don’t have full exposure when carry trades start to go down [then you'll be fine]. With those types of currencies, when they go down, they go down fast. The first indication of risk unwinding in carry currencies is that everyone wants to get out and go into cash. Just being long carry, walking away, and believing that you’re going to make money especially with leverage put on can be pretty damn dangerous.
Isn’t it difficult to deal with the violent unwinds associated with carry trades?
If we see very violent moves, say a move of over 3-3.5% in one day, we would simply square out and wait for entry at a better level. From a technical point [of view] we are traditionally more medium term trend followers in the carry currencies and being long only carry.
2007 and 2008 represented completely different market environments. Can you explain how you adapt to such changing conditions?
From an option trading point of view volatility is good for us so we don’t really change anything [if volatility goes up]. From a spot trading point of view if we are concerned about a change in direction, traditionally we will scale back on our decisions until we feel comfortable in that market environment. I think in general we will always see shifts in the trends. It always happens with a lot of volatility to start because the market players are fighting to find direction and I think it’s good at that time to then step back and let them fight and find out which way we’re going to go first. Let the market show who’s going to win the battle then slowly creep into it again.
Mikkel Thorup currently manages the FXG10 fund. To find out more about investment possibilities please consult the Capricorn website.
Imbalance: Will the Euro benefit from China’s reserve diversification and the FOMC’s upbeat sentiment?
source: ecb.int
Yesterday China released news that its foreign exchange reserves increased to $2 trillion! This is a gigantic number and I’m surprised why it was all over the news wires and bank reports yesterday but everyone seems to have forgotten it today. Perhaps earnings of big banks like JP Morgan are more important. It’s no wonder now why China had been pushing a switch to a new global reserve currency instead of the dollar and started proposing SDRs (special drawing rights) as an alternative. The country simply has too many dollar assets and needs to diversify. The Euro climbed yesterday to above 1.41, but I many reports are asserting that this move was due to renewed risk appetite in the markets rather than the diversification. I don’t know how serious the market is taking this news, but it certainly seems like an imbalance is developing in the dollar, and I would make a case to consider Euro strength. Consider the following arguments for Euro strength:
1. China has the largest US dollar reserves in the world and is looking to diversify. The next currency in line would be the Euro due to its liquidity.
2. The FOMC yesterday showed more signs that recovery is closer than they originally thought. They stated in the April meeting that “weak sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories, fixed investment, and staffing,” however in the June meeting added, “…but appear to be making progress in bringing inventory stocks into better alignment with sales.” Further, instead of simply stating that economic activity ”is likely to remain weak for a time,” they added in the most recent statement that ”policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.” This increasing focus on recovery means that the market will start to worry less about the recession and more about debt and inflation caused by quantitative easing and stimulus packages on top of the already large debt. The market will start to sell off US treasuries in anticipation of the Fed raising rates to attract capital, and this could hurt the Dollar substantially.
3. There hasn’t been so much diversification talk in recent times (perhaps when Kuwait moved off the dollar peg in 2007 came close). Medvedev brings some newly minted “World Reserve Currency” coins, China urges the world to move away from the dollar, Japan gets involved in verbal intervention to support its US treasury holdings, and traders get out of positions close to the G8 meeting– If something significant happens regarding diversification it’s going to be in the near future (months to a few years)
4. The Euro has been ranging for a month while economic indicators have been surprising in both directions and other macro markets such as stock indices and oil have been making large moves. Volatility is underpriced in the EUR/USD pair and if a move starts developing it may explode. I would advise being long gamma, not short gamma on this pair.
This is not advice to go immediately buy the Euro. If it falls tomorrow or over the next month then don’t blame me. What I’m saying is that there is an imbalance here and what we need is a sentiment shift to reinforce a long bias. The way we trade is to make intelligent choices for bias (i.e. have a good reason), put small positions on when sentiment goes our way, and then add to that position when things really start moving. So far I have a small position on in the low 1.40s and will see if this continues to develop nicely. If not, no big deal. We’ll wait for the next opportunity.
