The Greatest Rally of All Time? The Day of 1987 Crash

Boris Schlossberg

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Howard Marks, the famed investor who runs more that 100 Billion at Oaktree Capital, tells a story of a phone call that changed his life. He had a conversation with Michael Milken who was just starting out as the king of junk bonds at the time. Milken told him that, “If you buy AAA or AA bonds they only have direction. If you buy single B bonds, and they survive, all the surprise will be on the upside.”

Out of that brief encounter Marks took away the lesson that all investments are about price. As he tells Business Insider, “There’s no such thing as a good investment idea, until you’ve discussed price.

Investing well is not a matter of buying good things, it’s about buying things well. And people have to understand the difference. And if you don’t understand the difference you are in big trouble.”

Mark’s observation made me think about the great stock market crash of 1987. I am embarrassed to admit that I am old enough to remember it. And ironically enough I was at Drexel Burnham Lambert, the very firm that Milken made infamous, when the crash occurred.

What very few people realize is that the 1987 crash was also the day of one of the greatest stock market rallies of all time. At around noon, after a vicious sell-off in the morning, stock staged a massive rally that brought the indices almost to breakeven. All in all, the move from the bottom to its apex was more that 200 Dow points or greater than 10% gain in matter or hours. Trader who bought the bottom and exited midday made a fortune. Of course, equities then faded into the afternoon and ended up down more than 500 points on the day or more than a 22% drop -- still the biggest one-day decline in US stock market history. But if you were a trader, there was almost as much money to be made from the long side as there was from the short side. All of which leads me to conclude that in trading just as in investing price entry is everything.

So as traders, we should banish the concept of oversold or overbought. We should stop worrying if we are aligned with trend or not. The only real question to ask whenever you make a trade is -- did I get a good entry or not? The answer to that query will determine your chance of success far more than any strategy you use.

Trading Discipline? Waste of Time

Boris Schlossberg

The greatest economist that ever lived was John Maynard Keynes. (All the Austrian School economists, indulge me for a minute). But besides saving capitalism and setting the foundation for our modern world, Keynes was a damn good trader.

Here is how Keynes performed during the depth of the Great Depression managing the endowment of King College, which he managed to increase tenfold over a period of twenty years.

Keynes

As you can see, for a pointy headed academic, Keynes was a very skilled trader. One of Keynes great quotes is, “I would rather be vaguely right than precisely wrong.” That’s pretty good advice for life overall, but it’s probably the greatest trading advice ever given.

I was thinking about Keynes’s words when I was live trading in the BK Chat room during last night’s UK Retail Sales. As I was furiously moving in and out of the pound, the yen and the various pound crosses I suddenly realized that there are three very distinct states of trading. There is the ideal trading model that you develop after thousand of hours of observation and back testing. There is the live market price action that rarely corresponds to the exact parameters of the model and lastly there is the actual trading that you will do under real market conditions that will only approximate the rules of your model.

Don’t get me wrong. It’s extremely important to have all three components in order to trade successfully. You can’t trade a strategy unless the intellectual foundation is technically valid. But it is naive beyond belief, to think that having a great trading strategy is all you need to make money in the markets. The markets are designed first and foremost to wreak havoc with your strategies and force you out of your trades, usually at the worst possible time. Speculative markets are essentially nothing more than massive poker bluffing machines whose primary function is to transfer the wealth from the weak hands to the strong hands.

The easiest way to become weak is of course to over leverage your trades. But beyond that I think the other way to let the market wear you down and destroy you is by being too disciplined, by faithfully following your model on every single trade, every single day. Doing that will inevitably create two problems. After some period of time your model will begin to lose -- and no matter what you tell yourself -- just like a spouse who cheats on you -- will grow to resent your model and then doubt it and then eventually abandon it, even though in the long run it may prove to be very profitable.

So it’s actually okay to be sloppy, to be imprecise, to make mistakes. In my BK chat room I laid out my run to the 00’s model using crisp, clean instructions that looked wonderfully efficient on the chart. But of course in the mayhem that followed news trading, my execution was off, my first exit was flawed and my second exit was driven more by psychological compunction rather than proper risk control.

And yet it was perfect trading day.

We made money because I got the big thing right -- direction. And most importantly I did not fret about botched executions, or missed opportunities or unfavorable spreads. I focused on the only thing that really mattered -- where was the trade going?

And as John Maynard Keynes made perfectly clear -- in trading and in life that’s the only thing that matters.

RBA Meeting Preview

Australian Dollar australian dollar forecast Forex News Kathy Lien Reserve Bank of Australia reserve bank of australia intervention US Dollar

The Reserve Bank of Australia meets tonight and new central bank governor is at the helm.  Phillip Lowe, former RBA deputy governor succeeded Glenn Stevens and investors will be paying close attention to the new governor’s tone. Chances are he is going to play it safe and maintain the central bank’s upbeat outlook.  The last time they convened they expressed confidence in the trend of growth and labor market.  When Lowe spoke last month, he said the labor market is not as strong as the unemployment rate suggests and inflation is expected to remain low for some time. Taking a look at the table below, there has been as much improvement as deterioration in Australia’s economy since the last monetary policy meeting with broad improvements in China.  So while RBA Governor Lowe may be optimistic, the main takeaway will be patience.  AUD may fall on this but at a time when the central banks of the U.K., Eurozone, Japan and New Zealand are considering more stimulus, a neutral bias will make any declines shallow. In fact we believe the better trade is to be long AUD pre-RBA.

 

 

EUR/GBP – Time for a Breakout

EUR/GBP – Time for a Breakout

Chart Of The Day

EUR/GBP – Time for a Breakout

Tomorrow is Super Thursday in the U.K. because we have the Bank of England monetary policy announcement, Quarterly Inflation Report and a speech from Mark Carney on tap. Independently each of these event risks could trigger big moves in sterling but together, we can be assured of a breakout in EUR/GBP. For the past week, EUR/GBP has traded in a tight 70-pip range. The downside has been limited by the 50-day SMA and the upside capped by the March high. While there may be a head and shoulders forming, a break below 0.7850 would be needed for the pattern to continue emerging. However if EUR/GBP breaks above 0.7950, the next stop should 80 cents.

Fundamentally, forecasting the outcome of tomorrow’s events is difficult to forecast because the Bank of England has to balance weaker growth with hotter inflation and Brexit risks. They’ll want to stay neutral about the pros/cons of Leave/Remain but at the same time realistic about its risks. Recent U.K. economic reports show manufacturing and service sector activity slowing, retail sales falling and wage growth decelerating. Based on these measures alone, the BoE’s February growth forecasts look too optimistic. However inflation is on the rise with oil prices up more than 45% since the February inflation report and sterling trading lower. The latest consumer and producer price reports won’t be released until after the central bank meeting but rising inflation expectations along with price pressures will prevent the central bank from talking about easing.

EUR/JPY Time To Step In?

EUR/JPY Time To Step In?

Chart Of The Day

Yen has been on fire gaining yet another 400 points this month as USD/JPY sliced through 110, 109 and even 108.00 levels dragging down EUR/JPY along with it. At some point the BOJ is going to react as the strength of yen will begin wreaking havoc with the nascent recovery in Japan.

Although intervention by BOJ is often reversed, the central bank may not be so timid this time as it tries to catch the late shorts flat footed. In the meantime euro continues to hold bid and will likely stay that way until Fed changes its posture. Therefore EUR/JPY could be set to explode on any short covering in USD/JPY. With the pair now holding near the 123.00 support a double bottom could be in the making.

EUR/USD – Its Time for a Breakout

EUR/USD – Its Time for a Breakout

Chart Of The Day

EUR/USD – Its Time for a Breakout

The ECB is widely expected to ease monetary policy this week yet the euro refuses to fall, which leads many investors to wonder if easing has been completely priced in. The market expects the central bank to lower the deposit rate (a decision they passed on in December), but there’s very little consensus on the actions they could take. The ECB experienced the consequences of under delivering last year and they will want to avoid a decision that could squeeze EUR/USD higher, undermining the effects of the stimulus. Besides lowering the deposit rate, the ECB could increase the amount of assets purchased per month, extend the end date of bond buying and possibly even introduce new TLTROs. Since analysts are predicting an increase to the QE program of anywhere from zero to 20 billion euros, there’s plenty of room for surprise. In addition Mario Draghi could talk about doing more in the coming year that could also affect how the euro trades. Therefore while we agree that investors have priced in a 10bp deposit rate cut, there’s so much more the ECB could to do that would weaken the euro.

Technically, EUR/USD is trapped between 2 moving averages and Fibonacci levels. Above we have the 200-day SMA near 1.1050 and the 50% Fibonacci retracement of the March 2015 and August 2015 rally near 1.11. Below there’s the 61.8% Fib of the same move right at today’s low and then the 100-day SMA. The ECB rate decision certainly has the significance to break the pair out of its range and given the fundamental backdrop we are still looking for a downside break.

How Yogi Berra Taught Me to Win 95% of the Time

Boris Schlossberg

In my day trading room we try to hit 95% of our trades. We do this because I am firm believer in the insurance model of day trading (lots of small wins with a few large losses) rather than the lottery model of day trading (a few large wins and many small losses). Lotteries are for suckers while insurance companies are some of the best businesses in the world. I have discussed this subject many times in prior columns, but today I can across another reason why my model is working our chat room.

I was reading a summary of Brett Steenbarger book on Trading Psychology on Ivanhoff’s Capital webpage when I came across this tidbit

“A small win is a small mirror. It reflects a winning image to us. Accumulate enough small wins and that winning image starts to become familiar. We internalize that which we experience repeatedly. That’s one of the reasons positive emotional experience is important….People I’ve known who are particularly adaptive have made small wins a habit pattern. They undertake many new challenges and regularly define meaningful, doable goals. They set themselves up for success. Positivity becomes a habit, a lifestyle, making the whole issue of discipline moot.”

Without really appreciating its power, I hadn’t realized just how valuable the idea of frequent wins is to overall success of the trader. I have seen with my own eyes as more and more traders in my room start to put together profitable runs of days, weeks and even months. In the world of retail trading this an exceedingly rare occurrence and I don’t think it’s due only to efficacy of my strategy but rather to the fact that positive experience creates good habits that leads to better performance.

Which brings me to Yogi Berra. He died this week and it is true testament to the kind of man he was that his death managed to stand toe to toe in headlines with Pope Francis’s visit President Xi’s White House arrival. Berra was not just a great athlete but a great philosopher. His sometimes unintended witticisms are far more quotable than anything uttered by Jean Paul Sartre (and I would argue more insightful as well).

Berra is famous for saying, “You can observe a lot just by watching.” Which is a lesson that I live by every day. Whenever people ask me why I don’t back test my strategies I always think about that Yogi Berra quote and laugh. Markets like any man made social constructs are fluid and ever changing. Back testing data is like trying to figure out social habits of Millennials by studying the Victorians. It’s why every perfectly backtested system, whether it be done on your MT4 package or by Andrew Lo of MIT, always fails. Its why if want to succeed in day trading you watch what is happening now. As Mr. Berra used to say, “In theory there is no difference between theory and practice. In practice there is.”

Upon his death many analysts have re-examined Berra astounding athletic achievements. And as fivethirtyeight has pointed out what’s absolutely remarkable about Berra is that no one with his slugging percentage has struck out less. Berra only struck out 5% of the time and he was notorious for being a bad ball hitter. That means that instead of waiting for a perfect pitch he took what the pitchers threw and tried to make contact. And any time you make contact in baseball you have a chance to score.

This is perhaps Berra greatest legacy and his most valuable lesson to us as traders. Instead of looking for the perfect set up or the absolute best execution, we should try to figure out how to turn every trade into whatever win, scratch or small loss that we can. Berra collected 10 World Series titles by never trying to be perfect but by winning by any means necessary.

The One Mistake Traders Make All the Time

Boris Schlossberg

Here is a mistake we make all the time.
We are sick.
We are tired and sleep deprived.
We had an argument with a family member.
We are rushing to a business meeting.
And in all those situations we put on a trade.
Tiny.
Just for fun.
For sh-ts and giggles really as the Brits call it.
Inevitably this is a trade that blows up a month’s worth of profits.
How do I know?
Because I’ve done it a thousand times. And so have you.
In trading we are so conditioned to believe that success lies in “strategy”, in that one perfectly tested algo that beats the market all the time.
But in reality success in trading depends really on only one thing -- focus.
Like a good athlete, a top musician, a skilled surgeon -- we all need focus.
Knowledge alone is not enough. Markets are brutal. If you day trade, blink and the exit is gone.
Almost all good boxers have the skills to fight if they practice enough. Just like most good traders generally know how to trade their strategy. But what separates the champions from the rest is situational awareness, The ability to adjust, sometimes just by as an inch to the environment around them.
Great traders are the same way. They can “read” the market and respond appropriately. But that requires focus.
Very often we forget that.
Most of the trading mistakes are not a function of bad analysis, but rather the result of bad focus.
So next time you are sick, tired, angry, distracted and are on the verge of hitting the buy/sell button. Do yourself a favor.
BIG TRADES+DAY TRADES+24 HOUR TRADING ROOM -$145 All in
Don’t.

BK EUR/USD Big Trade +80

Swing

***BK EUR/USD Big Trade -- Close EUR/USD at market now 1.1125 for +80. We will lay out new orders to sell again at a higher level.


BK Big Trade – Why it is Time to Top Pick Euro

Sell 1 lot EUR/USD at market (now 1.1205)

Place Order to Sell 1 lot EUR/USD at 1.1410

Stop 1.1550

It has now become clear that investors used yesterday’s post FOMC intraday rebound in the dollar as an opportunity to buy the euro at a lower level. The single currency rose for the sixth consecutive trading day to its strongest level since February. The last time we saw such continuous strength without a pause or retracement was in March 2009 and at the time, the rally lasted for 8 trading days before the EUR/USD turned sharply lower, falling 800 pips in the course of a month. We can find 3 reasons for today’s rally but before we get into them, the one thing that is NOT supporting the uptrend in the EUR/USD is fundamentals.

Most of this morning’s U.S. economic reports surprised to the upside while the latest Eurozone data highlighted ongoing weakness in the Eurozone economy. German retail sales fell -2.3% in the month of March, the steepest decline since December 2013. The unemployment rate for the Eurozone was expected to improve slightly to 11.2% but it held steady at 11.3%. The German jobless rate also remained unchanged at 6.4% as only 8k people fell off unemployment rolls compared to a -15k forecast. Moody’s also lowered Greece’s credit rating but EUR/USD traders ignored the move. Instead, these are the 3 reasons behind the euro’s mind boggling rally versus the U.S. dollar.

1. German – US Yield Spread is Moving Higher!

U.S. yields are up today but German yields moved even higher. The following chart shows how EUR/USD is being boosted by the German – U.S. 10 year yield spread, which started to turn higher right when the currency pair broke above 1.09.

sg2015043047937

2. Euro Accelerated Gains after Break Above 50-day SMA

The rise in the EUR/USD gained momentum after it broke above the 50-day SMA shown in the chart below. This was first time that the currency pair had done so since May. The move also accelerated as stops were trigged above the March high of 1.1052.

3. Positioning

Of course positioning had a lot to do with the move as the persistent strength of the currency and the break of a key resistance level that capped gains in the pair for the past 1.5 months led to short covering.

What’s Next for EURO? Move Back Down to 1.10

So where is EUR/USD headed next? Fundamentally, the EUR/USD should be trading lower. Technically, the currency pair is also closing in on some important resistance levels. The 61.8% Fibonacci retracement of the record high and record low for EUR/USD sits right above current levels and not far from that is the 100-day SMA. We believe that these resistance levels along with the overstretched rally should lead to a near term move back down to 1.10.

EURUSD043015

BK EUR/USD Big Trade +50

Swing

We are out of EUR/USD Big Trade for +50

BK EUR/USD Big Trade -- Move stop to 1.0915 to lock in 50 pips

***Update on 3/23 -- BK EUR/USD Big Trade -- First Entry TRIGGERED --

BK EUR/USD Big Trade – Time to Sell

The Trade:

SELL EURUSD

Place Order to Sell 1 Lot EUR/USD at 1.0965

Pace Order to Sell 1 More Lot at 1.1127

Stop at 1.1235

Risk on our BIG TRADES is large, so make sure your position is small.

We will manage the take profit dynamically and send out alerts on when to take profit and/or move your stop.

—--

Revisiting Our Monetary Policy Divergence Trade

It’s a great time to start scaling into fresh EUR/USD short positions. Today’s FOMC statement was clearly less hawkish that investors had anticipated leading to a sharp slide in the U.S. dollar but nothing has changed – the Federal Reserve is still on track to raise interest rates this year. Policymakers may have lowered their growth and inflation forecast and changed the “dots” that measure individual expectations for rate rises but we never believed that the Fed would raise rates in June. A September hike on the other hand is almost assured.

Everything that Yellen said in her press conference points to tightening this year. In fact she said that while a rate rise in April is unlikely a hike any meeting after that including June is possible. With 3 months to go before this key summer meeting, the central bank has plenty of time to see how data fares before making their decision, which explains why Yellen said no patience is not the same as impatience. The Fed is in no rush to raise interest rates but if data starts to improve they won’t hesitate to do so and today’s change in forward guidance provides them with maximum flexibility to make changes when necessary.

For this reason, we believe that there is a fire sale in the U.S. dollar right now and if you don’t buy in the next few days or weeks, you may regret it. We are already long USD/JPY so we are laying out our EUR/USD orders above market. Quantitative Easing in Europe has just begun and with 18 months of bond purchases ahead, the euro should find its way back below 1.05 versus the dollar.

EURUSD031815

The Trade:

SELL EURUSD

Place Order to Sell 1 Lot EUR/USD at 1.0965

Pace Order to Sell 1 More Lot at 1.1127

Stop at 1.1235

Risk on our BIG TRADES is large, so make sure your position is small.

We will manage the take profit dynamically and send out alerts on when to take profit and/or move your stop.

BK USD/JPY Big Trade +40

Swing

Out of USD/JPY Trade for +40

BK USD/JPY Big Trade Move to 120.67 to lock in +40 on trade

***USD/JPY Big Trade Second Entry TRIGGERED

***USD/JPY Big Trade First Entry at 120.27 TRIGGERED


BK USD/JPY Big Trade Alert – Time to Reload

***BK USDJPY Big Trade Order Changes

We are moving our USD/JPY entry levels up:

Place Order to Buy 1 lot USDJPY at 120.27

Place Order to Buy 1 More at 118.85

Stop for ALL at 117.75


The Trade:

USD/JPY

Place Order to Buy 1 lot USD/JPY at 118.30

Place Order to Buy 1 Additional lot at 116.90

Stop for ALL 115.35

Risk on our BIG TRADES is large, so make sure your position is small.

We will manage the take profit dynamically and send out alerts on when to take profit and/or move your stop.

—--

It is time to Buy USD/JPY.

Less hawkish comments from Federal Reserve Chairwoman Janet Yellen should give us an opportunity to snap up USD/JPY at a lower level. While the Fed is in no rush to raise interest rates, Yellen’s optimistic outlook for the economy and inflation leaves a 2015 rate hike on the table.

The recent pullback in the dollar indicates that investors had hoped for more from Yellen but a June rate hike was never realistic. The central bank doesn’t want to raise interest rates too quickly because they fear that a premature increase would undermine the recovery and hamper job healing.

Instead we expect forward guidance to be changed in June and followed up with a rate hike in September. Market expectations had gotten ahead of themselves in recent weeks so a pullback is natural but the most important thing to remember is that the Fed will still raise interest rates in 2015.

Therefore we still think that buying dollars is the best bet and with the latest CFTC data showing a reduction in USD/JPY longs, there’s plenty of opportunity to the upside once the enthusiasm for Fed tightening returns. The next catalyst for a rally in USD/JPY will be next week’s ISM and non-farm payroll reports. If U.S. data starts to improve again, investors will return to the dollar.

The Chart

USDJPY022515

USD/JPY
Place Order to Buy 1 lot USD/JPY at 118.30

Place Order to Buy 1 Additional lot at 116.90

Stop for ALL 115.35

EUR/USD – Time for a Breakout

EUR/USD – Time for a Breakout

Chart Of The Day

EUR/USD – Time for a Breakout

Between Fed Chair Janet Yellen’s testimony on Capitol Hill, ECB President Mario Draghi’s testimony on monetary policy and the Eurogroup’s decision on Greece’s reform plan, tomorrow will be a big day for the EUR/USD. From both a technical and fundamental perspective the currency pair has been itching for a breakout and waiting for a catalyst to set it on a new direction. We know that the EUR/USD is deeply oversold and short positions are stretched but with the ECB increasing stimulus and the Fed looking to raise interest rates, there is a reason why the EUR/USD is trading at its current levels. How the EUR/USD trades on Tuesday and the days ahead will be determined by whether the gap between Eurozone and U.S. policy widens or narrows. If Yellen talks about tightening and Draghi emphasizes the need for easy monetary policy, the currency pair will break to the downside but if Yellen sounds less eager to raise rates and Draghi seems more comfortable with regional risks now that Greece has received an extension, a short squeeze could finally drive EUR/USD higher.

Taking look at the daily chart, the consolidative triangle pattern is clear. If the EUR/USD breaks the top of the triangle, the next stop should be 1.1645, a former support turned resistance level. If it breaks the downside and takes out 1.1275, the next area of support is at the 11 year low of 1.11.