Trade Like Tiger

Boris Schlossberg

(I wrote this about goalies but it might as well be about Tiger)

In the world of sports, there is no more paranoid position than being a hockey goalie. You are, for intents and purposes, a human shield used for target practice. Your job is to stop the angry sting of rubber puck flying at you at more than 100 mph as you try to make sense of the constant swirl of motion in front of your goal. You play on a team but are essentially alone. You cannot win games but only lose them.

Little wonder then that hockey goalies tend to be a bit “peculiar”. In my own misspent youth minding the net, I wouldn’t hesitate to throw my mask, glove, stick -- anything that I could get my hands on -- at my poor defensemen, when I was even slightly displeased with their positioning. I would heap a torrent of verbal abuse on them that I would never unleash on my worst enemy. And yet these big, beefy guys, who under different circumstances could snap my neck in two without breaking a sweat, meekly absorbed all of my rants. Such is the power of a hockey goalie.

A few years ago NY Times ran an article talking about what sociologists call “non-normative” traits of being a hockey goalie. There was Bernie Parent, the famed keeper of the Broad Street Bullies, who took a nap with his German Shepard every day. Another NHL goalie compulsively stripped off his uniform between each period to take a shower as an elaborate superstition ritual. My favorite, however, was Gilles Gratton, who as New York Times writes, “bounced around in the minors in the ’70s before ending his career with the St. Louis Blues and the New York Rangers. Gratton liked to skate in the nude sometimes, wearing just his goalie mask and refused to play if the stars did not line up properly. He believed that in a previous life he was an executioner who stoned people to death and that he was fated to become a goalie — someone on the receiving end of a stoning, so to speak — as punishment.”

Although, goalies rarely if ever score a goal, any hockey player worth his weight will tell you that you can’t win the game without a good one which is what makes the story of Martin Brodeur so interesting. Brodeur was the inimitable netminder of the New Jersey Devils who spent more than 20 years in the league. He is no doubt one of the more talented goalies in NHL history, but what makes Brodeur unique is his ability to recover from losses.

In a profile of him by the New York Times, the paper wrote,

“Hockey people say that Brodeur’s particular strength is his ability to bounce back from a bad goal or a bad game and not let it gnaw at him. Hockey was locked out for the first half of this season, and during the Devils’ truncated training camp last month, you could see that he hates to be scored on even in practice, rapping his stick or ducking his head in disgust after letting one in. But the cloud passes in an instant, and then he’s bouncing on his skates and looking for more pucks to swat away. Lou Lamoriello, the Devils’ general manager, says, ‘Marty’s mental toughness, his ability to overcome a bad game, is just phenomenal.’ “

The older I get, the more I realize that there is simply no greater skill in life than the ability to recover from adversity. This is doubly so when it comes to financial markets, which like a hockey puck traveling at 150 miles per hour will do their best to knock you off balance every single day.

When we are young we think we are invincible and therefore never give much thought to recovery, assuming that our body and our mind will just snap back. But as we get older and hopefully a bit wiser we begin to pay more respect to the process of recovery. When I was young I had the bad luck of catching six cases of pneumonia before I was twenty years old. The net result was that my lungs were shot and whenever I caught a cold it usually turned into a month-long bronchial infection that made New York winters a constant misery.

But I as I got older I began to take my condition more seriously. Instead of trying to “gut it out”, I would drop everything at the first sign of sniffles, get in bed, drink 6 liters of water and try to sleep for 12-14 hours at a time. Doing this, I’ve managed to cut my recovery time from an average of three weeks to just a few days and have had far fewer colds in my 50’s than I did in my 30’s.

When it comes to trading, the ability to recover is far, far, far more important than the ability to win. No matter how hard you try, no matter how good you are, no matter how robust your strategy -- you will lose. And it’s at that point that true success will be determined.

Just like with my colds, I’ve learned over time that recovery from your trading losses depends far less on you being “right” and far more on you being “small”. Smaller trades lead to smaller absolute losses which give you time to assess the markets with a much cooler head. You don’t rush into the same trade, you don’t try to win it all back at once and you don’t carry the burden of your losses for days on end. Like Martin Brodeur, you realize that the darkness passes and tomorrow brings another day of opportunity to go toe to toe with the market.

How I Gained a Years Worth of Wisdom Trading the 1 Minute Chart for 24 Hours Straight

Boris Schlossberg

Like time lapse photography of the building of the Eiffel Tower, the one minute chart is a thing of wonder. It allows you compress year’s worth of trading into a mere 24 hours and exposes the real dynamics behind how returns in markets are truly made.

Last week, I was teaching a course on one of my new strategies. The strategy was designed to catch big turning points on the four hour, daily and even weekly charts, but on a lark to I put my trading robot on a one minute chart just to see what would happen. The results were so interesting that I quickly did this with my other strategies in a variety of permutations and here are some of the ideas that I unearthed.

Everything is lumpy.
The great lie of finance is to convince investors that it can take the wildly chaotic and uneven lumpiness of real life and turn it into a steady and predictable stream of returns. Nothing can be further from the truth. Perfect 45 degree equity curves only exist in the fantasy of backtests. The reality is that equity almost rises and falls with stomach-churning bumpiness of a rollercoaster even on the most risk-controlled strategies. That’s because all strategies are basically thrown against the market regime. Sometimes they are in sync and sometimes they are out of sync and no amount of risk control will prevent a drawdown when styles clash. Just take a look at the two charts below and you quickly get an idea that like all things in life, trading is a streaky business.

TurnTrader

Power48

2. Pain is easiest in small bites

When you are trading a daily or weekly chart, every trade can seem like a scene from Hamlet. You double and even triple guess yourself and torture yourself with every slow dripping tick of the chart., When you are doing 150 trades per day the stops are mostly a blur, as long as you control risk. My trade size on all these strategies was .5 lever or 10,000 units per every $20,000 equity. That’s right I was even trading at 1:1 leverage. This made it a lot easier to absorb losses even when they came three, four, five in a row. My worst drawdown was only 75 basis points from equity and just 2.5% from peak to trough. This allowed me to have the psychological strength to trade through the losses and made me realize that the only way to survive in the markets is either through time or size. If you are an investor you simply wait out the adverse price movements sometimes for decades at a time. If you are a trader you take tiny losses until the price action turns your way.

3. Robots are the future.

None of this would have been possible if I didn’t have a robot placing my trades. The robot took every signal, managed multiple entries and exits, dynamically adjusted all the stops and take profits and cleared inventory every time. Over the course of 24 hours it made more than 250 trades without an error -- a feat that even the best human trader would be hard pressed to accomplish and most of us would fail miserably.

Next week I should have more than a thousand samples each and will return with my thoughts on what this experiment teaches us about the delicate balance between risk and reward.

Can Retail Traders Trade like the World’s Biggest Hedge Fund? Yes!

Boris Schlossberg

Ray Dalio built Bridgewater Associates into the world’s largest hedge fund, on one simple idea -- safe assets can give big returns if lever them correctly.

Yes, yes, yes. I know that Risk Parity strategy has been a huge beneficiary of secular yield declines, global yield compressions and that greatest gift of all -- Quantitative Easing.

But details aside, the fundamental insight that made Dalio billions upon billions of dollars was that you did not have to risk your hard earned money on risky stocks. You could just buy nearly risk-free treasury assets and then lever them up so that a one year t-bill yielding a virtually guaranteed rate of 1% levered 5X would suddenly transform itself into a 5% annual return without any of the heart palpitations of holding stock.

I am of course simplifying greatly, but Dalio’s success holds lessons for us all. We all have a variety of strategies we trade in FX. Some are lottery type payout ideas that bleed money until one big hit pays out for a year’s worth of work. Others are just the opposite. Insurance like products that provide small but steady profits each day but can wipe out half the equity on one badly stopped trade. And then there are strategies that just tread water.

I have one such day strategy myself. It makes about twenty trades per week and on a good week ekes out about 40-50 pips of profit. It has modest stops and even more restrained profit targets and just the tiniest of an edge to give me a small return. All in all, it takes about 100 trades to make 100 pips of profit from this strategy.

That probably horrifies most of you. I still remember the howls of outrage from some of my members when I told them that most good day trading strategies essentially have a positive expectancy of about 1 pip per trade. This is basically equivalent of walking up Broadway from downtown to uptown and bending up at each street intersection to pick up a penny. After about 10 blocks you will quickly grow tired of the task. But imagine if you had an automatic hoover machine that grabbed those pennies for you. Not only that, it sorted them out, put them in rolls, deposited them in your bank account without you doing any work.

That’s the power of a day trading robot. If I had to hunt and peck my way to 100 day-trades a month, I would have stopped a long time ago. But with my EA working 24 hours a day, I never have to worry about missing an entry, managing my exit or watching the market. This very modest strategy runs by itself and slowly adds pips to my account.

This is where Ray Dalio’s strategy comes in. While my day trading is hardly a Treasury bill, it is the lowest volatility strategy in my portfolio. It rarely declines by more than 50 to 100 pips from peak to trough. That means I can margin it at 5X lever and have decent shot at making 500 pips per month or about 5% on my money. That’s huge! If I even come close to that target that means I can aim for 60% returns with maybe 20% max drawdowns. Such payouts just don’t exist in standard market instruments where the absolute best you can hope for is to lose about half what you seek to gain (so if you want to double your account, be willing to lose half of it -- and very likely more than that).

That’s the power of automated trading in today’s retail markets. It allows you to mimic the risk profile of the world greatest hedge fund, without having a billion dollars in the bank.

USDJPY – Have We Hit Support?

USDJPY – Have We Hit Support?

Chart Of The Day

Its been a brutal day for risk as Dow dropped -500 points and Italian political drama upended the markets, but after vicious selloff markets are due for some reprieve. With Italian story now moving off to the sidelines as the country awaits new elections in a few months, the focus shifts to US data as the markets take a look at the first key report of the week -- the ADP employment release.

This week is unusual because all of the preliminary data actually follows the NFPs on Friday, so the ADP is the only clue to how strong the payrolls will be. If the job picture in the US continues to perform to expectation the 10Y yields should start to creep back towards 3.00% and USDJPY should follow in turn. The pair appears to have found some support in front of the 108.00 level and if it can hold the lows, a rally back towards 110.00 could be in store.

NZDCAD –  Back to the Lows?

NZDCAD – Back to the Lows?

Chart Of The Day

In a rather butchered syntax, the RBNZ came out on the wires stating that it currently had no plans for unconventional policy (ie QE) anytime in the foreseeable future. The comment was more telling for what it denied rather than what it stated s it revealed that RBNZ is clearly much more preoccupied with easing policy initiatives rather than having any plans to tighten.

On the other hand, BOC meets on May 30th and although the market is only assigning 27% probability to rate hike in May, the bank may offer forward guidance that is more hawkish. Taken together with promising signals on NAFTA deal from President Trump, the loonie looks like a relative bid against the kiwi which suggests that NZDCAD can be headed back towards .8800 in the next several days.

GBPUSD – Will 1.3400 Hold?

GBPUSD – Will 1.3400 Hold?

Chart Of The Day

Today almost all the BoE members were cautious in their Parliamentary testimony. They all suggested that monetary policy will move towards normalization sooner rather than later. This indicates that the much expected BoE rate hikes will simply be postponed to end of summer rather than 2019.

UK data is the most important economic report in G-7 calendar this week and tomorrow’s UK CPI data, as well as Thursday’s Retail Sales, will go a long way to determining if cable can move through 1.3500 and stage a sustained rally.

In the meantime, the pair continues to hold around the 1.3400 having failed in its breakout of 1.3500. If the numbers miss their mark, the pair could be on its way towards 1.3300 by week’s end.

Is Euro Ready for a Bounce?

Chart Of The Day

After a near 800 point decline from yearly highs, the euro appears ready for a bounce. The pair has suffered everything from concerns over the slowdown of growth in the region to the upstart government in Italy that seems hellbent on challenging the norms of sovereign debt to the ever-tense relationship with the Trump administration.

But after so much selling most of the bad news has already been priced in and the pair found support today ahead of the 1.1700 level and bounced impressively. Wednesday’s EZ Flash PMI’s could show that activity in the region has stabilized providing a fundamental catalyst for more short covering. Meanwhile, the hammer forming on today’s chart shows that buyers have regained control and could squeeze the pair higher as the week proceeds.

AUDNZD Stalling Ahead of 1.0900?

Chart Of The Day

AUDNZD put in quite a run over the past week gaining nearly 200 pips during that time. The rally has been driven by dovish RBNZ stance which suggested that it may actually lower rates in the near future. Meanwhile, the RBA remains resolutely neutral and the eco data has been steady, indicating that after nearly two years of inaction the central bank may want to reconsider its posture.

Tonight’s AU employment data could provide a strong clue to the strength of AU economy. If labor conditions continue to tighten further the gap between AU and NZ yields on the long part of the curve will widen out further and the pair could push towards the key 110.00 barrier. However, if the numbers miss, so rebalancing is due and the pair could retrace back to 108.00 by end of the week.

USDJPY – Once More to 110.00?

USDJPY – Once More to 110.00?

Chart Of The Day

Last week’s tepid US CPI readings and the weak NFP readings the week before that have cooled traders expectations of Fed rate hikes going forward with the market essentially pricing in the prospect of only 3 hikes this year.

Fed officials, however, continue to assume a hawkish stance with Cleveland President Mester reaffirming the view that inflation may go above the 2% range. So far the Fed analysis has been far too optimistic core CPI readings did push through the 2% ceiling last month – but only just – marking only the second time this year that the core readings have risen above the 2% level.

Part of the reason for muted inflation readings is the woefully slow gains in average hourly earnings. Given the tax cut, the stimulatory aspect of fiscal policy and the relative tightness of the labor market, economists expected nominal wages to rise between 3.5%-4.0% by now, yet the gains have only been 2.6% creating very little real wage growth for the US consumer.

Tomorrow’s US Retail Sales will provide the most important view of the state of US final demand. The market is anticipating a rebound in US Retail Sales of 0.5% from 0.2% the month prior. If Retail Sales improve USDJPY will make another run at 110.00, but if the number misses its mark once again and shows a paltry growth of 0.2% or worse, the Fed futures market will start to pare its bets regardless of what the Fed officials will say as evidence will continue to mount that case for further tightening is simply not there.

USDCAD – On the way to 1.2600?

USDCAD – On the way to 1.2600?

Chart Of The Day

One of the strongest currencies over the past few days has been the loonie. It’s up more than 230 pips against the buck since the start of the week after having failed to take out the upside at 1.3000 level. Higher oil prices. strong funda data and creeping doubt that the Fed will not hike rates more than 2 more times this year have all helped the currency to rally over the past 48 hours.

If the labor data tomorrow surprises to the upside, the markets will begin to price the prospect of BOC rate hikes before the end of summer. Right now the BOC is the only G-7 central bank to seriously consider additional tightening and with the Canadian economy doing better than expected chances are good that BOC may resume its normalization policy soon.

With 1.3000 firmly rejected, the path of least resistance in the loonie is towards 1.2600 and a strong labor number tomorrow could send the pair in that direction before the week is over.

USDCHF – More to Go?

USDCHF – More to Go?

Chart Of The Day

One the strongest, yet most ignored trends in the FX market over the past few months has been the one-way rise is USDCHF. Although the pair is overbought registering 13 out of the last 15 up days, it shows no signs of a slowdown as the slow and steady dollar rise continues.

This week the FX market will focus on US inflation data which is expected to bounce, given the sharp rise in gasoline prices. If the numbers meet or beat the forecast, the buck will see more strength as the week progresses. USDCHF now faces resistance at the 1.0050 level, but if it can bust through that ceiling the pair could stretch all the way to 1.0200 before finding sellers again.