The Hidden Trade that is the Key To Long Term Success

Boris Schlossberg

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Ask most traders what are the possible outcomes of a trade and they will inevitably give you a binary answer.

You either win or lose.

But if we think about it for a second, there is actually a third choice. You can neither win nor lose. In short, you can basically not lose and close the trade out for even. If we go over our many trades, there are countless examples of trades that may have started out badly only to rally to breakeven and then ultimately fall apart.

The art of NOT losing is perhaps the most underappreciated skill in day trading. It is, in fact, the foundational strategy of high probability businesses like insurance and casinos. Insurance companies are of course notorious for eliminating any possibility of large payouts. They are in the business of collecting premiums but the moment a client presents any type of collectible risk they move swiftly to cancel the policy. The insurance companies much like casinos will make sure to rig the rules so that customer has virtually no chance at collecting a payout.

So in Las Vegas, they will stop you from counting cards in blackjack and in Hartford they will make sure to exclude all coverage of any malady you may already have. Indeed, the current debate on pre-existing conditions in Trump-care is simply an attempt by insurance companies to collect as much premium as possible while providing the absolute minimum coverage necessary to satisfy the contract. Indeed, as my wife just pointed out to me under Trump-care pregnancy will be considered a pre-existing condition and could cost insurance buyers as much as $17,000 in out of pocket expenses even if the woman has full coverage.

Now we can all lament the evils of the insurance business, but it has a lot to teach us about trading. The more I trade the more I realize that there are really only two viable models of making money. The low frequency, high-profit model where your wins are very few but are massively larger than your losses and the high-frequency high probability model where the losses are very rare.

We are all familiar with the fact that throughout the whole history of the stock market all of the gains have come from only 20% of all publicly traded companies. Fully 80% of stocks are long term losers. And even amongst the 20% of winners, it is only a handful of equities that are responsible for almost all the stock market returns.

That’s why index investing is so hard to beat. When you buy the index you are essentially buying the whole lottery pot and betting that you will capture the few jackpots that will pay for all the losing tickets. Little wonder then that the hedge funds have been getting killed looking for the diamonds in the ruff amidst a pile of garbage.

But there are other actors in the market that actually play a very different game. HFT (High-Frequency Trading) funds have gotten a bad rap for being nothing more that digital “front runners”, but in reality, they employ a wide array of strategies almost all of them focused on mitigating risk. In fact, HFTs are the kings of the “not lose” trade as they break even on as much as 50% of their positions per day and yet make money almost every single day. Big firms like Virtu have lost money only on one day in six years.

If we are day-trading, the insurance model is the way to go and the “not lose” trade should be studied much more seriously. It is the hidden key to long-term trading success.

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AUD/NZD – Near Term Support Levels

AUD/NZD – Near Term Support Levels

Chart Of The Day

AUD/NZD – Near Term Support Levels

We’re currently long AUD/NZD and thought it would be worthwhile to look at the chart from a shorter term basis. For the first time since mid-December AUD/NZD broke above the 20-day SMA. While there’s overhand resistance at 1.0480 (created by the 50 and 100-day SMA cross) the MACD is crossing to the upside and the 4 hour charts show support between 1.0400 and 1.0430.

Fundamentally AUD was the day’s best performing currency thanks to the rebound in gold prices and the slide in the U.S. dollar. The AU-NZ yield spread also moved significantly in favor of +AUD/NZD. Tonight Australia’s PMI services report is scheduled for release and if the PMI manufacturing index is a guide, the data should be stronger.

EURGBP is 8900 a Near Term Bottom?

EURGBP is 8900 a Near Term Bottom?

Chart Of The Day

The euro was shellacked last week post ECB presser while cable managed to hold its own causing EURGBP to drop 2 big figures off the highs. This week the price dynamics may reverse as UK eco data could sour the market on any recovery while the news out of the Eurozone could surprise to the upside.

With no progress on the political front the Brexit issues hangs over the pound like the sword of Damocles while the upcoming UK GDP figures could underscore the difficulty of the new economic regime as business sentiment turns very cautious. Meanwhile, in EZ we have already seen a strong rebound in PMI data and the IFO report that suggests growth in the core region is picking up pace. That should provide some support for the euro and ease any concerns about further accommodation from the ECB.

Technically the pair has strong support at .8880 on the hourly with deeper support at .8800 while the upside does not offer any serious resistance until .9200

GBP/USD – A Near Term Bottom?

GBP/USD – A Near Term Bottom?

Chart Of The Day

Although UK economy continues to perform well -- better perhaps than any other in the G-7 universe -- cable has been hit hard by the dollar rollercoaster and is down 500 points off the highs. The weakness in the unit has not be the sole result of dollar strength. The market is also worried about the prospect of Brexit as PM Cameron must appease the right wing of his party and arrange for a referendum of whether UK should pull out of the European Union.

Brexit would be an unmitigated disaster for UK and few market participants believe that the plan would pass, but it nevertheless has unnerved the market and only added to trader skittishness in absence of other news.

Tomorrow however, the market will get a look at the latest UK GDP figures and the expectation is that they will be revised higher which could put the focus back on fundamentals and perhaps spur a rebound in cable.

Technically the pair bounced off the 1.5300 support which remains a key level on the downside while the upside now is contained by 1.5500

EUR/GBP – Approaching Major Long Term Support

EUR/GBP – Approaching Major Long Term Support

Chart Of The Day

Fundamentals

The EUR/GBP is on the verge approaching lows it hasn’t seen since 2008. The reasons for the decline have been startlingly clear for many months. UK is on the verge of coming off the zero rate standard while the ECB is likely to compound their negative rate policy with additional QE increasing the gulf between the two monetary policies. Tonight’s EZ CPI could be key as to whether the ECB will actually take the plunge sooner rather than later. Another negative read which would suggest that deflation remains persistent could push the ECB policymakers over the edge and Mr. Draghi may announce new measures at this weeks presser. On the other hand any slghtly positive news could delay action and provide the EUR/GBP with a modicum of selling relief.

Technicals

The EUR/GBP pair now finds itself on the 7700’s as it approaches very long term support at the 7700 level that has not been seen since 2008. A break there would open a run to 7500 while only a retake of the 7900 figure alleviates the bearish bias.

EUR/USD – Near Term Bottom?

EUR/USD – Near Term Bottom?

Chart Of The Day

Fundamentals

After the ECB decided to ease monetary policy earlier this month, the euro has been quietly consolidating against the U.S. dollar leading many traders to wonder if it is in the process of carving out a near term bottom. Fundamentally the odds of a stronger rebound in the EUR/USD in the coming week outweigh the risks of a deeper slide. The market’s expectation for higher U.S. rates is one of the main reasons why the EUR/USD has been under so much pressure. Whether or not that happens hinges in large part on next week’s FOMC meeting. The Fed is widely expected to continue tapering asset purchases, sticking to their plan to end Quantitative Easing in October. However many questions still need to be answered such as will reinvestments continue, has the central bank accelerated its timeline for raising rates and will Yellen downplay the improvements in the U.S. economy. We know the Fed plans to hold rates steady for a “considerable time” once QE ends but the performance of the dollar suggests that investors are hoping for a more hawkish statement that either involves the central bank dropping this line from the FOMC statement or Yellen admitting that rates could rise early next year. The more forward guidance the Fed provides on rates, the worst it will be for EUR/USD. Ambiguous and noncommittal comments would be a disappointment that could erase a large part of the dollar’s gains and send EUR/USD sharply higher. Unfortunately given Yellen’s usual disposition, chances are she will provide as little guidance as possible and for this reason we expect EUR/USD to trade higher on the back of the FOMC meeting.

Technicals

As shown in the monthly chart, the EUR/USD found support at a fairly important technical level, the 23.6% Fibonacci retracement of the 2008 to 2010 decline. If this level is broken, the next area of support will be the 2013 low of 1.2750. On the upside, if EUR/USD breaks above 1.30, there is no major resistance until 1.3150.