Take Your Lumps

Boris Schlossberg Uncategorized

One of the maddening things about trading is that it resists any and all attempts to turn it into a regular business activity. For most of us our greatest desire as traders is to achieve steady, positive returns that compound on a daily basis. But trading is not and will never be a job with the predictability of a bi-weekly paycheck because Mr. Market is unlike any boss you will ever have.

In the normal world of salaried employees we get paid irrespective of whether we are having a good day or bad one. In fact for may of us we can even play hookie, or call in sick and do no work at all and still get paid. At worst if we are commission based employees like salespeople, we simply do not get any cash if we perform poorly on any given day. Mr. Market however is a much more insidious boss. Not only does he not pay you on any day that you do not work, but he actually goes into you bank account and pulls out money that you already posses, the moment you make a mistake.

That’s a very disturbing reality for most traders to accept. In the real economy, only self employed business owners ever face that dynamic and even they experience it very rarely. For example if you were to run a coffee shop, your day to day business would be relatively predictable. It is almost inconceivable for a coffee shop owner to have 1000 customers one day and zero customers the next. The flow of business in the regular economy is generally steady. In the financial markets however the flow of returns is much more lumpy.

This notion became crystal clear to me when I was looking through a backtest of an intra day flow strategy that I trade. No matter what filters I applied there were just some months when the methodology did not work and it lost money. In others months it just printed pips with barely a bad trade in the batch. In fact I realized that the best you can hope for when you are trading is to simply dampen your losses as much as you can when the markets are not cooperating while staying in the game long enough to enjoy the winning streaks. Make no doubt about it, financial markets are very streaky. Most of the time prices bounce around in a state of indecision until a dominant theme develops that generates strong directional flows. Furthermore, because it only takes the press of a button to change your mind, the financial economy is much more volatile than the real one. That’s why a famous analyst once quipped that the US stock market predicted 9 out of the last 4 recessions.

So in summary the best we can hope for when we trade is not remain at breakeven for most of the time and make your money during the few months when the markets are trending. In finance unlike in real life, the payouts are lumpy and you need to learn how to take your lumps if you want to succeed.

Will DPJ Leadership Have a Lasting Impact on the Yen?

2009 japanese yen 2009 japanese yen forecast hatoyama Kathy Lien

The Japanese Yen strengthened across the board as investors cheer new leadership in Japan. After more than 50 years of unchallenged power, the Liberal Democratic Party (LDP) has been finally defeated by the Democratic Party of Japan (DPJ). The big question of if and when Prime Minister Aso will announce his resignation was answered almost immediately with Aso conceding defeat and confirming that he will resign as LDP head. Mr. Hatoyama, the current leader of the DPJ is expected to be confirmed as the new Prime Minister of Japan in approximately 2 weeks.

Who is Mr. Hatoyama?

Yukio Hatoyama has politics in his blood. His grandfather was the LDP’s first Prime Minister in 1955 and Hatoyama will be the country’s first non-LDP Prime Minister since 1955. He comes from a weathly family that has made their fortune in the industrial and political sectors. He is a fourth generation politician with a Ph.D in engineering from Stanford University. Although Hatoyama inherited his father’s LDP seat in 1986, he has been reelected to that seat seven times.

Some people in the Japanese political circle have called Hatoyama the “alien” as he can come off as eccentric and aloof. The Prime Minister role of Japan has been a difficult one for anyone to hold down for more than a year since Koizumi left office in 2006. As someone who can sound more like a teacher than a politician and has been criticized for being indecisive, Hatoyama has a tall task ahead of him.

The political landscape has changed dramatically for Japan with the DPJ’s victory. As the new party attempts to announce fresh measures aimed at stimulating the economy, there could be political turmoil. The DPJ does not have practical experience running the country and their goals are ambitious. Unlike the LDP whose initiatives have focused on business and public works, the DPJ’s initatives will focus on increasing disposable income for households. The party expects to pay for their new initiatives by cutting wasteful administration costs. Having previously criticized the Japanese economy for being overly dependent on exports, Hatoyama will be focusing heavily on boosting domestic demand.

Political Change Will Not Have a Lasting Impact on the Japanese Yen

However as happy as Japanese investors are about the change in leadership, the positive impact on the Japanese Yen could be limited. Long term trends in USD/JPY are determined by market fundamentals and overall risk appetite and not Japanese politics. With that in mind, USD/JPY is very weak. The sell-off in global equities and thin trading conditions ahead of the U.S. Labor Market holiday could drive the currency pair to a 6 month low of 91.75.

In terms of Hatoyama and the Democratic Party of Japan, it remains to be see whether they have what it takes to deliver on their promises of turning the economy around. If the global economy continues to recover, the DPJ could benefit from having the wind behind their sails. Either way, it will certainty be a daunting task for Hatoyama as the economy and his party’s legacy now rests on his shoulders.