Forex Trading Tips:Leverage With Little Risk

Boris Schlossberg

Leverage With Little Risk

I work at the World Financial Center which is located right next to Ground Zero, so effectively I have to navigate a massive construction site every time I need to go in out of the office. Each day as I make my way to and from the subway I follow a circuitous path up and down stairs and around teams of constructions workers and their gargantuan equipment. The noise, the never ending crowds of tourists, the teeming humanity of my fellow Wall Streeters would drive most of my laid back California friends crazy, but I love the hustle and bustle of it all.

One of the buildings I pass by every day is the Marriot Downtown hotel which is located right on the West Side highway. Not near it, but right on it. When guests come out of the entrance they are greeted by the swishing noise of speeding traffic. The other day as I was leaving my office on a relatively quiet midday afternoon, I noticed a line of taxis sandwiched on a pull off lane of the highway awaiting fares from the hotel and I stopped for a moment to observe. There was absolutely no action from the hotel. The cabs sat motionless for minutes as traffic whizzed by.

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If I was driving a cab in New York, I thought to myself, would I be willing to wait for 10-20 minutes to pick up a fare? Absolutely not. The key to making money driving a taxi is to keep the meter running by constantly picking up fares. In New York especially during the middle of the day, you cannot drive more than 10 blocks without finding someone looking to hitch a ride. In fact the completion for cabs amongst passengers in New York can often rival the intensity of traders in the crude oil pits of the New York Mercantile exchange also located in my building complex.

Why are these guys just sitting there? I wondered in frustration. Get on the road, turn that meter over and make some money, I silently urged the taxi drivers as I headed to the subway.

As I ducked underground, the sight of dormant taxi meters made me think about trading and leverage. Often, in trading leverage is viewed strictly as a function of your borrowing capacity. Borrow 10 dollars for every dollar of your equity and you are 10:1 levered. Borrow 20 and you are levered at 20:1 and so on. We are taught to believe that they only way to achieve greater leverage is to borrow more. But that’s wrong. Leverage can also be achieved through inventory turnover. A taxi driver that can flip over 30 rides every day instead of 10 will make more money by the end of the day. A trader who can flip over his positions frequently (assuming he maintains the same success ratio) will get a higher return on his account without the need to borrow more capital.

This week I did something interesting with my scalping account. I lowered the size of my positions, cutting risk to 1% of my account of each trade from 2%, but I increased the frequency of my trading. The net result was a much smoother equity curve. Even at the end of the week, when I went off the rails ignoring my own model and making a number of idiotic impulsive trades, my lower position size kept me out of trouble and I ended the week net even, when under my former trading conditions I would have probably lost 10% of my account. I was annoyed at the lack of discipline, but my account was in much better financial shape because of the change in tactics. By flipping my trades over in smaller size, I was able to match my lever ratio but with considerably less risk. The strategy saved me from my own worst habits and since in trading what matters most is how much money you have in the account rather than how good or bad you feel about your performance I was much better off in the end.

AUD Reaction to New Prime Minister

aud/usd Australian Dollar australian dollar forecast Kathy Lien

It is exciting to be in Australia during such a monumental time when the country ushers in its first ever female Prime Minister. Haslinda from Bloomberg managed to wedge me in between Rudd’s resignation speech and Gillard’s acceptance speech -- though I would have been happily bumped by such a significant event.

Click on the image to access the interview. We talked about my reaction to the new Prime Minister and outlook for the FX market

Forex Trading Tips: No Fear

Boris Schlossberg

No Fear

I’ve missed more than 9000 shots in my career. I’ve lost almost 300 games. 26 times, I’ve been trusted to take the game winning shot and missed. I’ve failed over and over and over again in my life. And that is why I succeed.
Michael Jordan

This week I crossed the breakeven line in my scalping account seven times in less than four days. I made more than 100 trades and for most of the week I had nothing to show for all my efforts. The P and L in my account remained essentially the same as I made money, lost money, made money, lost money over and over and over.

Was I frustrated?

Yes.

Was I willing to walk away from the screen and abandon my efforts?

Absolutely not.

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There was nothing wrong with my scalping strategy. The mistakes as always were strictly my own. I ignored the rules of entry. I rushed trades. I was careless in the management of my stops and limits giving back profits while letting losses run. In short I was committing every sin of trading known to man except one – I wasn’t quitting.

I knew my strategy was good. When I followed my rules it worked more often than not. More importantly I knew that even when I executed to plan, the strategy would always hit a drawdown in choppy trade before recovering to new highs. So I stopped worrying about losing money and started focusing on making proper trades. Sure enough by the end of the week my equity had climbed higher by 2.5% as I became much more selective l in my entries and exits.

Sometimes I think the market is Biblical in its ability to frustrate us and we are all playing the role of Job. Of course that’s not true. Much as we want to blame our shortcomings on the machinations of the Gods the fault almost always lies within us. I noted last week at the expo in Pasadena that trading is simple but never easy and I continue to believe that to be true.

Trading is always a battle between you and the market and you and yourself. Most of us focus on the first part but rarely think about the second when in fact the second battle is much more important in the long run. We have no control over the market but we can learn to control ourselves. Fortunately for us, we do not need the super human dunking skills of Michael Jordan to succeed at this game. We simply need to share his attitude of never fearing to fail.

Kathy Lien Headed for Australia!

euro forex blog Kathy Lien Travel

I am so excited to announce that I will be headed to Australia next week! Here’s my schedule. Hopefully I will get a chance to meet or reconnect with some of you in person.

Seminars

Brisbane Traders Expo (June 18 and June 19)
Brisbane Convention & Exhibition Centre

Friday June 18:

11am Learn the Basics of Forex Trading GFT Booth
12am 3 Easy Ways to Trade Currencies GFT Booth
2:15pm Actionable Forex Trading Strategies Exhibitor Seminar Room 2
3pm Forex Signals and Pattern Recognition at Your Fingertips GFT Booth
4:30pm Australian and U.S. Dollar Outlook Exhibitor Seminar Room 2

Saturday June 19:

11am Learn the Basics of Forex Trading GFT Booth
12am 3 Easy Ways to Trade Currencies GFT Booth
2:15pm 3Ms of Forex Trading Exhibitor Seminar Room 2
3pm Forex Signals and Pattern Recognition at Your Fingertips GFT Booth
4:30pm Actionable Forex Trading Strategies Exhibitor Seminar Room 2

Forex Master Class Sunday June 20 Register
Sofitel Brisbane | Ballroom Le Grand 3
Registration: 2 p.m.
Customer meet and greet: 2:30 p.m.
Main Session: 3 p.m. -- 5 p.m

+ Battle-tested short- and medium-term trading strategies
+ How to spot and react quickly to changes in market momentum
+ How to take advantage of trend and counter-trend moves
+ How to scalp fundamentally and improve the use of common forex technical indicators


Media Appearances (Watch Me!) --

Wed June 23 Bloomberg CNBC Europe 3:20pm Sydney Time (1:20am ET)
Thurs June 24 Sky News Guest Host 7-8am Sydney Time (5-6pm ET)
Thurs June 24 Bloomberg TV 11:40am Sydney Time (9:40pm ET)
Fri April 23 CNBC Squawk Box Australia Guest Host 9-10am Sydney Time (7-8pm ET)

Roar! by Kevin Daum – A Book I Can’t Put Down

forex blog Kathy Lien

My friend Kevin Daum gave me a copy of his new book Roar! Get Heard in the Sales and Marketing Jungle: A Business Fable and I can’t put it down!

For anyone who has ever needed to sell anything, this book is both entertaining and educational. It has nothing to do with trading, but I assure you that the pearls of wisdom Kevin doles out will be applicable in some part of your life.

In the words of Ken Fisher, the CEO of Fisher Investments, “Everyone should have an old friend like Lenny.”

Forex Trading Tips: Pawn Star

Boris Schlossberg

Pawn Star

As a quintessential Upper West side New Yorker living my blue state limousine liberal existence, I’ve never been in a pawn shop in my life. In fact I did not know that pawn shops even existed until I took trip to Houston several years and was assaulted by billboard ads for their services at every intersection of the road of that city.I drove through Houston astonished that this was such a popular business enterprise and quickly forgot about them the moment I returned to New York.

I never gave Pawn shops another thought until a few days ago when I was flipping through Hulu and came across History channels new reality series called Pawn Star. Having already seen the finale of Lost and all the latest episodes of Burn Notice and Royal Pains, and having an hour to kill, I push the play button out of nothing better to do.

Pawn Star is a show is about three generations of pawn shop owners based in Las Vegas. With their Ed Hardy clothes, Harley Davidson motorcycles and black on black shirts and ties they look like a typical bunch of good ole boy goobers. But the Joe Sixpack appearance believes a surprising sense of sophistication and a very shrewd business acumen. The heart of the show is the father Rick Harrison who runs the business with his Dad “the Old Man” and his son. Rick has an almost encyclopedic knowledge of history and art and can just as easily discuss the provenance of an early Civil war pistol as he can quickly and accurately appraise a Miro lithograph. In fact, although he would be last to admit it, Rick is an American version of a Renaissance man.

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However, what impressed me most about the show (I managed to watch all 6 episodes in one sitting) was Rick’s unbelievable business discipline which he displays numerous times throuout the day. When you think about it pawn brokering and speculation are very similar. A pawn broker stands between a seller who requires instant liquidity and a buyer who may not materialize until some time in the distant future. In order to succeed, the pawn broker must buy at a price that will allow him ample margin of error so that he does not burn his capital.

One the best lessons that Pawn Star can teach us as traders is to walk away unless the price is right. Throughout the course the day Rick is presented with many alluring opportunities to purchase a wide variety of objects but he frequently passes up on the deal if he cannot get the right price for the item. Rick will let the opportunity walk out the door rather than pay too much for the deal.


This an incredibly important point to remember. After all as speculators we don’t have control over the spread or the news flow or the order flow in the market. Our only power is to stand down when the setup does not line up. One of the reasons why Rick can be so sanguine about letting business walk out the door is because he knows that there will be another customer along in a minute. As short term traders we often forget that fact when we get wrapped up in our battle with the market. No one is more guilty of that sin than me, but after watching Pawn star I’ve become a lot more conscious of the idea that not every deal is a trade to be taken.

Forex Trading Tips: Price Versus Value

Boris Schlossberg

Price Versus Value

What is a cynic? A man who knows the price of everything and the value of nothing.

Oscar Wilde.

In the latest book I am reading “Fooling Some of the People all of the Time,” hedge fund manager David Einhorn makes a great case for value investing. Einhorn who runs Greenlight Capital is an investor who can not only find deep value in an overlooked stock but can also uncover fraud and hype in massively overbought securities. In fact, the centerpiece of the book is his Herculean battle with Allied Capital that spans over nearly six years, involves scores of government regulators, threats of lawsuits and unwarranted investigations all of which would turn even Ayn Rand into a skeptic of the crony capitalism system we live in today.

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Politics aside however, Einhorn’s investment methodology is superb. Using an accountant’s mindset and a businessman’s nose for a bargain Einhorn approaches every idea with a dispassionate look at its economic prospects and makes sure that the management ‘s interests are always aligned with those of the shareholders. It’s old fashioned bottoms up investing that has made Einhorn and his hedge fund partners very rich over the past and if I was to have my savings invested I wouldn’t hesitate for a minute in giving Einhorn my funds.

Unfortunately Einhorn’s approach is totally useless to us as traders. Why? Because he spends most of his time fighting the tape. Einhorn will be the first person to admit that he may hold a short position for weeks, months and sometimes years as it moves against him only to capture most of his profits in one single day of collapse. Since Einhorn never knows when the market will finally come to his point of view, he must often endure massive adverse price movements against his position before ultimately reaping the benefits of his analysis. In fact the only time he will close out the position is if he believes that his original investment thesis has been proven wrong. The reason equity investors can maintain such Job-like patience is because they generally trade with very little leverage.


As currency traders we simply do not have this luxury. Even on a very modest 10:1 lever factor a mere 10% move against us will wipe out our entire account. That’s why as speculators we have to trade price not value. Holding on to your convictions in the face of rapidly mounting losses will almost always result in a blown up. Occasionally you may ride out the storm, surviving a margin call, but that will only set you up for a much bigger loss down the line.

As speculators we must always use stops and that approach can result in a maddening series of painful losses as price moves up and down without rhyme or reason. Being a spec can often feel like being a sucker at a poker table, as market fakes us out one way and then the other. But no matter how frustrating it may be a times we cannot deviate from our mission of trading price not value. Just like athletes, traders hit cold streaks all the time, but what differentiates the winners from the losers in both arenas is their ability to understand what the game is really about. In last night’s NBA finals Kevin Garnett missed eight shots in a row, but that didn’t stop him from making the winning basket that gave Celtics an insurmountable lead over the Lakers. Next time you are being chopped mercilessly by the market remember that all cold streaks end as long as you maintain your discipline.

How Does the EU/IMF Rescue Plan Work?

eu imf rescue plan eur/usd euro Kathy Lien

The euro rebounded this morning thanks in part to the new details released on the EU/IMF Rescue Plan. Reuters put together a VERY good synopsis dissecting how the plan works :

Q+A-How does the EU’s financial safety net work?

Below are details of the European Stabilisation Mechanism, which includes the European Financial Stability Facility, and how it could be used.

HOW MUCH MONEY IS AVAILABLE?

500 billion euros from the European Union and at least 250 billion euros from the International Monetary Fund, making 750 billion euros in total, or about $1 trillion. The EU money is divided into a 60 billion pot for all EU members and a 440 billion euro pool for the 16 members of the euro zone.

LENGTH OF THE PROGRAMME

The 60 billion euro pot will be in place as long as necessary to safeguard the bloc’s financial stability. The 440 billion euro facility, called the European Financial Stability Facility, is set up for three years.

WHAT IS THE LEGAL BASIS FOR THE AID?

EU law forbids the EU and its members from assuming the debt of other EU members. Therefore the aid is in the form of loans, which have to be repaid with interest, not grants.

EU law says a council of EU ministers can grant financial assistance to a member state in difficulties that are caused by exceptional circumstances beyond its control.

HOW DOES IT WORK?

If the borrowing costs of an EU or euro zone country rise so high that borrowing on the market is unsustainable for reasons beyond its control, that country can ask for EU help.

It would tell the European Commission, the EU’s executive arm, and the European Central Bank how much it needs.

It would also submit a draft economic and financial adjustment programme to the Commission and to a committee of EU deputy finance ministers and central bankers — the Economic and Financial Committee which prepares monthly meetings of ministers.

The ministers, acting on a proposal from the Commission, would then say “yes” or “no” in a qualified majority vote. Qualified majority voting is the method which the Council of the European Union often uses to decide issues in the absence of a consensus; conditions for passage include a minimum number of countries and a minimum number of voting weights.

The ministers would also specify the maximum amount of the loans, their price and duration, and the number of instalments to be disbursed. They would set the main policy conditions attached to the support.

The Commission would then negotiate a memorandum of understanding with the recipient country detailing the conditions.

WH0 BORROWS WHAT?

Once details of the assistance are settled, the Commission issues bonds to raise cash within the first, 60 billion euro limit. This borrowing is guaranteed by the revenues of the EU budget.

If more cash for a euro zone country is needed, a Special Purpose Vehicle (SPV) called the European Financial Stability Facility (EFSF), will issue bonds to raise money on the market within the 440 billion euro facility.

THE EUROPEAN FINANCIAL STABILITY FACILITY,

The EFSF is to be operational in June, once 90 percent of countries participating in it finish parliamentary procedures needed to put it in place.

The EFSF will be a limited liability company, operating under Luxembourg law, that will be run by a board of directors appointed by euro zone members — the same people who prepare euro zone finance ministers’ meetings.

The company will not need to ask for permission from euro zone national parliaments each time it wants to operate — decisions will be taken by euro zone finance ministers.

The bonds the EFSF issues would be guaranteed by all euro zone member states proportionately to their share in the capital of the European Central Bank. The bonds could be of whatever maturity is seen as best and would not be limited by the envisaged 3-year life-span of the SPV itself.

Once the EFSF raises money through the bond issue, it would lend money to the euro zone country in trouble charging higher interest, modelled on the mark-up charged by the IMF and similar to the one that Greece was charged.

The European Investment Bank will provide back-office services for the EFSF.

To ensure a triple A credit rating for the EFSF bonds, euro zone countries agreed to guarantee 120 percent of the value of the bonds and make a cash reserve for the operation of the EFSF.

Negotiations with credit rating agencies will start when the EFSF is fully operational and has a chief executive officer and are likely to last a few weeks.

HOW MUCH WILL IT COST EU STATES?

Nothing, unless the country which receives the assistance defaults, in which case either the EU budget or euro zone members or both will have to make good on their earlier guarantees.

No money will be spent upfront by EU institutions or member states, because they offer only guarantees, not cash.

The cost of raising the money on the markets by the Commission or by the SPV, and the cost of debt servicing, will be covered by the interest which the loans carry.

HOW WILL THE BURDEN BE SHARED?

The guarantees for the 60 billion euros are shared by all EU members. The guarantees for the 440 billion euros are divided between euro zone countries on the basis of their holdings of capital in the ECB, as is the case with the multilateral bailout package extended to Greece.

The ratio of ECB capital holdings indicates the 440 billion euros would be divided as follows, although actual burdens would differ depending on which countries were seeking aid and therefore unable themselves to contribute to a bailout:

GERMANY 122.85 FRANCE 92.25

ITALY 81.07 SPAIN 53.87

NETHERLANDS 25.87 BELGIUM 15.74

AUSTRIA 12.60 PORTUGAL 11.36

FINLAND 8.13 IRELAND 7.21

SLOVAKIA 4.50 SLOVENIA 2.13

LUXEMBOURG 1.13 CYPRUS 0.89

MALTA 0.41

DOES IT REPLACE THE EU’S BALANCE OF PAYMENTS FACILITY?

No. The Balance of Payments facility, which has 50 billion euros to play with, remains unchanged. Hungary, Latvia and Romania have already tapped that facility.

WHAT ARE THE CONDITIONS TO GET THE AID?

Loan instalments will only be paid out once the Commission and the European Central Bank are satisfied that policy conditions set for the borrowing country are met.

Strong economic policy conditions would be imposed to restore the sustainability of public finances of the beneficiary country and its capacity to finance itself on the markets. These conditions will be defined by the Commission, in consultation with the ECB.

Terms and conditions will be similar to those of the IMF.