The High Profit of Low Expectations

Boris Schlossberg

I had no intention of making a good trading system. I just wanted to create an EA that would trade a lot and pretty much stay at break even after commissions so that I could collect rebates. The idea was just to see if I could create a low volatility system that would spin off 5 or 10 pips in rebates every day -- all of which could compound to a nice 10% cash on cash return per annum.

But a funny thing happened. As I traded the system more and more I kept tweaking and refining the original concept and the system suddenly morphed into an actual alpha maker albeit at about one half the trade frequency rate of my original idea. Now I may actually have a genuine money making EA that also throws off some rebate pips along the way.

How did this come about? How did I create such a good EA? Precisely because I wasn’t trying to make money. By not focusing on profit, I could relax and just pay attention to process. That, in turn, helped me align the logic with my “ideal” setup and eliminated a lot of false entries. Add to that some unusual risk mitigation techniques (what my wife derisively calls the “half-half stop”) and suddenly the EA that wasn’t supposed to make money, did.

My friend Rob Booker tells his novice traders that they should focus on making $1 per week. He gets a lot of ridicule for this -- but it’s actually very good advice. Sure, almost anyone could probably make a $1 on a trade -- they goal is in KEEPING that $1 from slipping out of your account as the market tempts you at every turn. As the saying goes, the key to getting rich isn’t how much money you earn, but how much you keep.

The $1 per week trick is all about learning to protect profit -- a lesson that takes a lifetime to learn and that only the greatest traders fully master. But by setting expectations so low, Rob makes that task accessible to anyone -- even traders who’ve just started to trade forex. And that is the most interesting lesson of all.

Trading, in so many ways, is completely counterintuitive to real life. The law of low expectations is just one example of that. In all other aspects of life, we are taught to “reach for the sky”. To set our goals high and once reached, set them higher. But trading is not like playing the piano or learning how to cook or even writing a book. Trading is an activity so fraught with uncertainty that there is very little correlation between effort and result. That’s why the harder you try, the worse you will do. The rules of real life fail miserably in speculative markets. That’s why the completely non-intuitive approach of very low expectations can radically improve your performance. So for now, maybe don’t aim for a 1000 pip trades and try not to lose this week instead?

How High Can AUD Rise?

How High Can AUD Rise?

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How High Can AUD Rise?

The best performing currency this week was the Australian dollar, which extended higher for the 5th consecutive trading day against the U.S. dollar. In fact so far this month, there’s only been 4 down days for AUD/USD. This move took the pair to fresh 2-month highs well above 77 cents. Considering that Australian data has been mixed, U.S. dollar weakness, higher commodity prices and a renewed demand for risk currencies are the primary catalysts for AUD/USD’s rise. With no major Australian economic reports scheduled for release this week, these are the same factors that would fuel a continued rally in the currency. In the near term, we think some year end profit taking is warranted particularly after such a strong move in AUD/USD – its up nearly 4 cents in 3 weeks.

On a technical basis, the latest rally stopped right at the 100-day SMA, which is a possible point of retracement. If it makes it past that point, then the next stop should be .7815, the 50% Fibonacci retracement of the September to December decline and then 79 cents. If AUD/USD rejects the 100-day SMA and starts trending lower from here, 77 cents is the main level of support.

How High Will USD/CAD Fly?

How High Will USD/CAD Fly?

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How High Will USD/CAD Fly?

USD/CAD raced to fresh 12 year highs today as oil sank to 11 year lows. The correlation between CAD and oil has been in excess of 90% these days and for good reasons because oil is Canada’s number 1 export. The decline in crude prices completely overshadowed today’s better than expected trade data. Canada reported an unexpectedly significant improvement in the their trade deficit thanks to the first increase in exports in 3 months. Sales of motor vehicles and parts rose 5.9% while sales of metals and non-metallic minerals rose 20.5%. The weakness of the Canadian dollar has helped to boost non-energy exports and this needs to continue if Canada is to avoid recession. The IVEY PMI report is scheduled for release tomorrow and given the drop in oil, and the jump last month manufacturing activity, the odds favor a weaker release that could drive USD/CAD to fresh multiyear highs.

To get a grasp of how high USD/CAD can fly we have to turn to the monthly chart. USD/CAD is trading at its strongest level since 2003. While the mid 2003 high near 1.4190 serve as the first level of resistance, the main resistance level is 1.4290, the swing low from 2000 and the breakdown level from 2003.

EUR/USD – How High Can it Go?

EUR/USD – How High Can it Go?

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Ever since the release of FOMC minutes yesterday the euro has been the prime beneficiary of the anti-dollar trade and has now broken through the key 1.1200 level. The run has been driven primarily by market disappointment over the Fed September rate hike delay and could turn into a serious short squeeze during the low liquidity summer doldrum sessions.

How high can the pair go? It has resistance at the 1.1300 level, but if US financial markets continue to wobble and investors begin to fear that Dec rate hike is off the table as well, the squeeze in the EUR/USD could turn much more vicious and push the pair through the 1.1500 handle by summer’s end.

USD/CAD – How High Can it Rise?

USD/CAD – How High Can it Rise?

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USD/CAD – How High Can it Rise?

Over the past 3 trading days, we have seen USD/CAD soar close to 300 pips, which is significant for the slow moving pair. On Wednesday the currency pair broke through 1.25 to reach its strongest level in 2.5 months. With no economic reports released today, the move was driven by lower oil prices and a stronger dollar. The price of oil dropped 4% on the back of the first rise in crude stockpiles in 2 months and progress on the Iranian nuclear talks. Earlier this week we learned that Canada’s economy contracted 0.1% in the month of May. This follows the 0.1% decline in retail sales that same month. All of these factors have contributed to the weakness of the currency and if tomorrow’s U.S. non-farm payrolls report is strong, we could see further gains in USD/CAD.

Technically, there are a number of resistance levels ahead with the most important being 1.2635, the 50% Fibonacci retracement 2002 to 2007 decline. If it is broken then the main focus will be the March high of 1.2835 although any move could lose momentum near the 1.28 handle like it January and late March. If USD/CAD drops back below 1.25, then a deeper correction to 1.24 is likely.

How High Can GBP Rise?

How High Can GBP Rise?

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How High Can GBP Rise?

Sterling raced to its strongest level this year on the back of weaker U.S. retail sales, stronger U.K. wage growth and the residual boost from the Conservative Election win but with the Bank of England tempering the market’s expectations for tightening, how much further can GBP/USD rise? From a fundamental perspective, we know the U.K. economy is improving and we are still waiting on a turnaround in U.S. data but sterling has risen quickly in a very short period of time. The Bank of England also poured cold water on U.K. rate hike hopes by lowering their growth forecast for this year and next and warning that inflation could fall below zero before rising again. While the BoE is next in line to raise rates behind the Fed, it is looking more and more likely that they want to raise interest rates in 2016 and not 2015. U.K. data on the other hand continues to be firm with average weekly earnings rising at 1.9% versus the 1.7% forecast. Jobless claims dropped less than anticipated but the unemployment rate fell to 5.5% from 5.6%. Considering that inflation is nonexistent, the increase in wages is a net gain for U.K. consumers.

Technically, GBP/USD is closing in on key resistance near 1.5785, the 38.2% Fibonacci retracement of the 2009 to 2014 rally. If and only if this is broken will the next stop be 1.60.

USD/CAD – High Probability Move to 1.20

USD/CAD – High Probability Move to 1.20

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USD/CAD – High Probability Move to 1.20

From a fundamental and technical perspective, we have strong reasons to believe that USD/CAD will fall to 1.20. The Canadian dollar was the day’s best performer, rising to its strongest level against the U.S. dollar in over 3 months. What is interesting about the move was that no economic data was released from Canada and oil prices declined. However, last week’s positive news flow continued to boost the currency. The price of crude increased 20% this month, leading the Bank of Canada to drop its bias to lower rates. In fact, on Friday, Bank of Canada Governor Poloz said he is also very optimistic about the U.S. economy and believes that the adverse effect of lower oil prices will be gone by the second half of the year. The pickup in consumer spending and trade activity should lead to a stronger GDP report and it is one of the main reasons why we are looking for USD/CAD to hit 1.20.

Technically, USD/CAD is trading comfortably below its 100-day SMA and with the 23.6% Fibonacci retracement of the 2007 to 2009 rally broken at 1.2120, there is no major support in the currency pair until 1.20. In fact, we have strong reasons to believe that if 1.20 breaks, next stop for USD/CAD will be 1.18.

USDCAD – How High?

USDCAD – How High?

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Fundamentals

USD/CAD has taken out the 1.1500 level for the first time since 2009 as the price of crude continues to sink dropping below the $60/bbl line. Although Canada is a well diversified economy, energy still makes up 7% of the country’s GDP and the prolonged slide in oil is starting to take its toll as traders begin to price in the possibility of lower CAPEX and slower growth for the foreseeable future. Meanwhile the true extent of oil slide on the Canadian economy will only become evident if prices stay low for a considerable period of time. For now however the pair may run into longer term resistance at the 1.1500-1.1700 corridor.

Technicals

The break of the 1.1500 level while important still does not provide clear sailing for the loonie because the pair has a resistance overhead all the way to 1.1700 so progress much beyond this point may be stalled. A break above however would open a run to 1.2000 while only a move below 1.1200 would negate the bullish bias

AUD/NZD – How High Can it Go?

AUD/NZD – How High Can it Go?

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Fundamentals

AUD/NZD gaped higher to fresh yearly highs on the open of this week’s trade and so far has shown no indication of giving back its gains as sentiment towards kiwi begins to quickly sour. The wrinkly in the New Zealand politics is that Kim Dotcom has entered the election process and his free wheeling campaign may sway just enough votes to give the victory to Labor rather than the ruling National party. The prospect of such turmoil could wreak havoc with the currency and the pair is now feeling the heat. Tonight Trade Balance data could only exacerbate the moves if it prints worse than expected and creates fears of a economic slowdown in the region. The AUD/NZD therefore is vulnerable to further upside as volatility in the region increases.

Technicals

Technically the unclosed gap in AUD/NZD is very bullish especially if it remains so for a few more days as traders will then take it a sign of structural change in the currency. The 1.1250 level is the natural upside move in the pair while 1.1000 provides the downside support

How High Can AUD/JPY Fly?

How High Can AUD/JPY Fly?

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Fundamentals

One of the best performing currency pairs this week was AUD/JPY, which climbed to a 14 month high. A large part of its strength has to do with the recent gains in U.S. equities and USD/JPY but also in demand for higher yielding currencies. In the past, EUR/JPY had the strongest correlation with the S&P 500 but weakness in the Eurozone and the European Central Bank’s plans to increase stimulus led to a significant underperformance of the euro. So instead, investors have shifted their focus to AUD/JPY because it is not hampered by a dovish central bank. We don’t have much in the way of U.S. or Australian data next week but if stocks resume their slide and/or USD/JPY extends its gains, we could see AUD/JPY rise to new highs

Technicals

Taking a look at the charts there is no major resistance in AUD/JPY until 97.60, the 23.6% Fibonacci retracement of the October 2011 to April 2013 rally. A move back below 94 would be needed to negate the uptrend in the pair