9 Currency Traders Give Trading Lessons

Posted by Bigtrends on August 16, 2015 7:55 PM

Lessons Learned From 2014

Courtesy of dailyfx.com

A good trader never stops learning, and every mistake is another potential learning experience. Here are some of the top lessons our analysts learned, absorbed or suffered from our personal trading.

John Kicklighter, Chief Currency Strategist Turning Ideas into Action
David Rodriguez, Quantitative Strategist Less is Often More, and Trading is No Exception
Jamie Saettele, CMT, Senior Technical Strategist The 3 Ps - Process, Preparation, and Patience
Kristian Kerr, Senior Currency Strategist Waiting For the "Perfect Level"
Ilya Spivak, Currency Strategist Greed is - in Fact - Not Good
Michael Boutros, Currency Strategist The Value of Dynamic Leverage & the Breakeven Stop
Christopher Vecchio, Currency Strategist Respecting Levels for Breakouts - Ignore the Noise Inside Ranges
David Song, Currency Analyst Watching Currency Crosses for Underlying Strength
David De Ferranti, Currency Analyst Don't Always Believe What Policy Makers Tell You

John Kicklighter, Chief Currency Strategist

Turning Ideas into Action

I will always have a view on currencies, currency pairs and markets that I analyze regularly - whether bullish, bearish or neutral. And, in the event that I am 'neutral' on a setup, my approach to the markets is to qualify what circumstances (fundamentals, technical, market conditions) need to be met to shift that view back to an active bullish or bearish bias. Working with this active assessment method, I find that I am more prepared to identify appealing setups when they occur and execute my strategy without the haze of emotions clouding my judgment. Of course, that is how this approach works ideally. Reviewing my trading this past year, I find that too many good setups were left on the table.

While there are many examples of missed opportunities from short- to longer-term, one that stands out prominently in my mind is GBPUSD. Through the middle of the 2014, rate speculation for the BoE grew excessive - especially compared with the competitive view for the Fed. A technical break was made from a 12-month channel and a 100-day moving average. All the elements were there and I had a 'bearish' view. And yet, I didn't jump. Why? Like most traders, there were many 'reasons' through the long decline - 'I was too busy that day with meetings', 'the best entry was yesterday', 'there is event risk tomorrow', etc.

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Chart Prepared by John Kicklighter using Trading View Charts

As a strategist, I have to always have an opinion on the market, and that brings me most of the way to a fully-fleshed out trade. With a personal requirement of believing a trade has a 60/70 percent probability of playing out before taking a trade (given the risk/reward is appealing), my account statement should have more trades on it. My objective is to execute more trades on my analysis.

David Rodriguez, Quantitative Strategist

Less is Often More, and Trading is No Exception

 I finally realized what type of trader I am and-more importantly-what type of trader I am not. I've increasingly relied on automated trading for the vast majority of investing. Now it's a strong majority of the trading I do-in FX and otherwise. Why exactly?

My primary focus in writing for DailyFX is our proprietary algorithmic trading strategies and the FXCM Speculative Sentiment Index-a measure FX positioning and sentiment. The strategies use many tools to determine whether to buy and sell a given currency, but the basic tenet is simple: if 'the crowd' is buying as seen through the SSI, our strategies will often sell and vice-versa.

We use these strategies to go against the crowd not because retail FX traders are always wrong; our data actually shows that most retail trader positions are closed out at a gain. Yet when crowds get it wrong, they often get it very wrong. Past performance is not indicative of future results, but the benchmark trading systems have historically done well in volatile and trending currency markets.

It's critical to note that even professionals can and do get it wrong themselves. The Stark Currency Traders Index, which measures performance of professional FX managers, shows that professional traders in their sample have posted annual losses in three of the past five years. (In the interest of full disclosure, the Barclay Currency Traders Index shows positive returns in each of the past five years.)

I say all of this to hammer home a simple point: trading is not easy. I have focused on algorithms for the simple fact that I have performed far better when thinking methodically and systematically than when making discretionary trading decisions. Every decision I need to make inserts the risk that my emotions and my natural cognitive biases will lead me to make irrational decisions.

There are no absolutes in trading, and using algorithmic trading certainly isn't for everyone. But I've come to the realization that there is no sense in ignoring the obvious: my personality is suited to low-intervention algorithmic trading. To convince myself that less is more has its clear benefits.

Jamie Saettele, CMT, Senior Technical Strategist

The 3 Ps

Process, Preparation, and Patience. My lesson (suggestion) for 2015 is to (continue to) follow these 3 Ps.

Trading decisions must be governed by a process that generates signals. You must decide whether or not to take that signal. Prepare to make decisions based on the process. Without going into detail, my process is technical and the preparation involves marking charts with exact entry levels and stops. If/when the market trades to these prices, I'm prepared to make a decision. Since I trust the process, the decision is made quickly and confidently. Also, exercise patience when the process is not working. Nothing works all of the time....you will experience several months or longer where your process doesn't work

My largest drawdown took place in 2014. As I look back now, this isn't a surprise because markets need to move for my process to work and FX volatility was at record lows. At the time however, I battled self-doubt. Sticking with the process was a daily struggle and it took years of experience (and pep talks from my wife) for me to do so. If I'd abandoned the process at my lowest point in May, the rest of the year would have been a disaster. Instead, I stayed with the process and was prepared when volatility returned.

Kristian Kerr, Senior Currency Strategist

Waiting For the "Perfect Level"

Gann techniques can be astonishingly accurate at times with exchange rates often turning at key levels to the exact pip. It only takes a couple of times witnessing such events to succumb to one of the biggest pitfalls of trading with Gann - waiting for the perfect level.

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This happened to me a couple of times this past year in EUR/USD. My cyclical work suggested that the exchange rate would come under steady pressure over the course of the second half of the year - which it clearly did (in fact I was actually looking for a high in early May). However, looking back I don't think I capitalized on the move as well as I should have. This lack of P&L can be attributed to my hubris and desire to sell the euro at the "perfect level". From August to October when I should have been enjoying the fruits of my analysis I was just sitting on the sidelines waiting for a retracement or chasing the rate lower.

Ilya Spivak, Currency Strategist

Greed is - in Fact - Not Good

I entered a short AUDUSD position at 0.9328 on May 19. The technical setup seemingly couldn't have looked any more appealing. Prices broke through support at the bottom of a channel that had guided them higher for four months having first stalled at the chart barrier, signaling its significance. Money management considerations looked rosy as well, with the trade offering a 1:1.6 risk to reward ratio.

The trade began to work almost immediately, with AUDUSD plunging aggressively toward my objective. Within two days prices dropped to a three-week low and came within 7 pips of the target. From here, the selloff stalled. Prices drifted sideways for the next five days and I waited patiently, reasoning that a period of digestion was naturally reasonable after such a swift collapse. Throughout this period, the pair repeatedly came within just a few pips of my target, only to fall short of actually reaching it.

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On May 29, the Aussie broke higher out of congestion. It now looked as though the standstill I thought to be digestion actually reflected the evaporation of bearish momentum. This difference is of course impossible to discern until it is too late, so I told myself that the dominant downward trajectory remained in place and continued to hold on. The last chance I would get to take profits anywhere near my target was on June 3: the Aussie slid downward and - feeling vindicated - I settled in for another downward push. As it turned out, that was the last major decline until the trade was stopped out having been stubbornly held until June 13.

The lesson here is simple: don't be greedy. It was indeed impossible to know that the narrow range-bound price action in late May would precede a bounce, but that was not necessary. Momentum had obviously changed and a bounce was by no means out of the question. With prices treading water within pips of the target, there was no reason to hold out for measly handful of pips instead of booking at least half of the position and moving the stop to breakeven on the rest. To paraphrase hedge fund legend Paul Tudor Jones, it is always best to focus on how much money you can lose, not how much you can make.

Michael Boutros, Currency Strategist

The Value of Dynamic Leverage & the Breakeven Stop

You've heard me say it before - "No one went broke booking profits." It speaks to the decision that traders face every day- the choice to let it run or to book the gains. However, sometimes it's not about the number of winning trades, but more so in the trade management.

As it pertains to the intra-day trader, managing market exposure by adjusting both risk and leverage should be a fundamental part of your strategy. A topic dismissed by many traders is the use of dynamic leverage when trading, especially on a short-term timeframe. With stops and limits in place, many traders may be inclined to jump out once the initial target is achieved. However, when market conditions warrant, scaling out of a winning trade may help to boost the profit potential for a given setup. This must also be accompanied by a risk adjustment on the position by managing the stops accordingly.

It has been my experience that the two go hand in hand- one should not just book a portion without lifting the stops and with the same respect, one should not bring stops to break even without booking a portion of the trade. With increased volatility expected heading into 2015, finding opportunities to let winners run on a breakeven stop will continue to be an essential part of my short-term approach on markets. Simply put, sometimes it's not always how big your winners are, but how small your losses are that make the biggest difference. ALWAYS think capital preservation.

Christopher Vecchio, Currency Strategist

Respecting Levels for Breakouts - Ignore the Noise Inside Ranges

In early-Q2'14, when USDJPY was beginning to settle in its range just north of Y101, I was exhibiting the pitfalls of the "recency bias." As a cognitive bias, the recency bias in finance is typically associated with traders/investors overestimating their ability to maintain their recent performance in future periods. Here, I was exhibiting the recency bias with respect to the performance of USDJPY: I was forecasting further strength in the pair based on the fact that price was seemingly respecting a discretionary trendline drawn off of the February 2013, June 2013, and October 2013 lows, ignoring the nascent emerging range.

This expectation of continuation at each initial rally higher after January proved frustrating. On each attempt through Y102.75 (but for a brief trip towards Y104 that was quickly reversed), positions I attempted to stake out where unsuccessful at liftoff. The problem: each time an attempt to breakout was made, price would return back into the range.

My frustration stemmed from the fact that I was busy trying to execute the perfect entry on a breakout rather than allowing the market to dictate when the range was actually broken. After June, when price had broken the 2013 discretionary trendline, I decided to put the brakes on any attempts for a breakout with conviction. I dialed back my aggression, outlined a plan for the range, and gave myself clear rules for trading the

USDJPY: only if prices exceeded Y104.12 or Y100.75. By avoiding the noise between those parameters, my frustration ended there, and I didn't seriously think about USDJPY for another three months - during which time USDJPY toiled in a low volatility, 200-pip rut. Capital and time was redirected elsewhere (mainly to EURUSD shorts). My lesson learned from 2014 was established: waiting for a close outside of an established range before respect to a potential breakout.

My Top Trade Lesson was "Stay Flexible - Be Willing to Admit You're Wrong." The lesson was that if you identify price areas in which you know that your analytical assessment is misdiagnosing the instrument's market, by instituting strict risk management parameters, you can prevent losses from racking up. A stop is protection against losing capital, but traders can have the tendency to place stops based on their account equity and hope of what might happen, rather than what the market is dictating. By being ruthless with active risk management, you can cut your losses sooner - and thereby reduce the size of your losses overall.

David Song, Currency Analyst

Watching Currency Crosses for Underlying Strength

I stuck with the mentality of 'Stay Nimble But Don't Be Too Prudent' amid the shift in market dynamics, and it seems as though the deviation in monetary policy will continue play a major role in driving FX volatility as global investors continue to search for higher-yields.

U.S. dollar strength is likely to be a major theme in the year ahead as the Fed is widely expected to remove the zero-interest policy, and a glance at GBP/USD suggests the sterling may continue to underperform against its U.S. counterpart as markets see the Fed normalizing monetary policy ahead of the BoE. Nevertheless, the British Pound cross rates appear to be telling a different story as the Bank of England also remains on course to implement higher borrowing-costs in 2015.

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As a result, the underlying strength in British Pound may be better seen in crosses rates such as GBP/AUD especially as the Reserve Bank of Australia (RBA) retains the verbal intervention on the higher-yielding currency. With RBA Governor Glenn Stevens continuing to jawbone the Australian dollar, the bullish break in the Relative Strength Index (RSI) may highlight an extension of the bullish trend from 2013, and the pair may face increased volatility in the year ahead on the back of renewed bets for an RBA rate cut.

David De Ferranti, Currency Analyst

Don't Always Believe What Policy Makers Tell You

USD/JPY metamorphosed into a soaring butterfly from a sluggish caterpillar in 2014. The biggest one day move throughout the final months of the year was on a seemingly quiet afternoon in Asia / Pacific. The BOJ was expected to deliver another status-quo statement and once again refrain from further easing at their policy meeting. Suddenly Kuroda and co. shocked the world by unleashing a surprise expansion of their QQE program, which sent USD/JPY soaring by over 300 pips for the session.

Like most others; I had admittedly not expected the decision. This was primarily because of the stubbornly optimistic comments from BOJ policy makers over the course of the year. Rehashed statements that noted the 'economy has continued to recovery moderately' provided little inspiration to traders. Against this backdrop medium-tier Japanese data points passed by with the Yen barely batting an eye.

Yet worrisome trends in Japanese economic figures had been present for some time. Had I paid closer attention to these trends instead of discounting their importance due to status-quo BOJ commentary, the stimulus expansion decision would have been far more obvious. This is why one my top lessons from 2014 is to be an expert with economic data and to not always believe what policy makers tell you!
 

Courtesy of dailyfx.com

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