Leave the gambling to the customers!
This month I had the very good fortune to be invited to have lunch with a gentleman who until recently was the head of a bank. Before you go jumping to any conclusions I should first point out that the person concerned is (a) not Scottish and (b) his departure from the bank was nothing to do with failure! Indeed other banks would not have got themselves into such a mess had they been headed by people of this calibre, which is why I want to share this interesting experience with you.
First of all a bit of background on the gentleman concerned. I am obviously not going to name him so for simplicity let’s just refer to him as Tom. Tom is a friend of a friend, someone who was in England recently and just decided it would fun to invite Tom and me to have lunch with him knowing that we both had quite a bit in common. Tom you see originally qualified as an engineer. As did I, for my sins. On the face of it that is an unusual background for either the head of a bank or someone trading a fund. However, it is just possible that an engineering background is actually the most perfect background that someone in this line of work could have. But that’s another story for another day.
Over what turned out to be a 4 hour lunch Tom and I shared many insights and experiences. The parallels were uncanny. When Tom took the top position in the bank he inevitably become responsible for the banks trading activity, something that he knew very little about. But he quickly realised that this division had the potential to be both a goldmine and a deathtrap. His logical and highly disciplined mind also led him to conclude that we work in the present and that the future by definition cannot be known in advance. This led to him imposing just one simple rule on the traders at the bank. This is how he described his briefing of the managers of that division:
“I don’t claim to have the faintest idea of how you traders do the work that you do, nor for that matter do I have any intention of learning! However I do know a thing or two about risk and probability. If a customer rings you up and wants to sell Yen, for example, then by all means buy the Yen from the customer. That is what we are here to do – to make markets, provide liquidity and to service our customers’ needs. Then you decide what to do with the Yen. You can flip them straight back out if you want. You can hold them for a few minutes or even a few hours if your experience tells you that is the best thing to do. You are free to do whatever you choose and you will be judged on your performance as any other profit centre.”
“However, by the time you leave the office at night every position will have been completely unwound. This is my one and only rule. If you ever go home carrying a position overnight, don’t bother coming in the next morning because your desk will already have been cleared!”
- Gambling is fine. Just as long as its not with our money!
“Let me make this perfectly clear: We provide a very important and valuable service to our customers, but we do not speculate. If a customer believes that he or she knows what the future holds and wishes to bet on it, then we are more than happy to assist him or her in taking that gamble. But as we certainly do not know what the future holds, we have no place putting our money on the line.”
Does that sound like a bit of a contrast to what we have been hearing about banks recently?
Every day I hear traders talking authoritatively about how the the high of the day is now in, or the low of the day in now in, or this market can run up to this price, or that market is going down to that price…etc. Do you think any of these traders make money? Its a pretty safe bet that these are the traders, or gamblers should I say, regularly feeding their apparently surplus cash into the markets.
Traders who make money couldn’t give two hoots about such things because they know such things are totally irrelevant to their work. Traders who make consistent, regular, reliable returns do so by working in the present, with reality, with fact. There is no place in their day for all of this hypothetical, speculative nonsense.
The truth is that the less analysis you do, the fewer indicators you use and the less you believe you know what will happen next week, tomorrow or even in 5 minutes time – the sooner you will become successful in the markets.
Success in the markets comes from learning how to react to what is actually happening and not from gambling on what you think should be happening in the future. Tom realised that without even being a trader and he drew an absolute line between the present and the future. In his case that line was drawn at the end of the working day, something that was easy for him to monitor and manage. In my case with my work that line is drawn at the end of the current swing in the market, whether its a swing on a daily chart or a 1 minute chart. Beyond the current swing I have no visibility, so I put that out of my mind.
If you are someone who is still worrying about what would, could or should happen next, take a step back for a moment. Think seriously about where your effort would best be spent and where you should draw your own line between what is fact and what is not. This might just be the change of focus that turns your career around.
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Copyright © Simon Townshend Ltd 2009, all rights reserved
That tiger had teeth!
This is a follow up to my article of June 26th – Catching a tiger by the tail. (Its on the home page www.Simon-Townshend.com if you are a more recent subscriber.)
If you recall we were looking at the sugar market and discussing how to manage a long position in what we thought would be one of those rare examples of of an “outlier” trade. At the time I wrote:
“…when trailing a stop with the objective of catching an outlier event, remember to leave the market room to breathe, don’t trail the stop too tightly. Here we saw nice follow through on Wednesday and Thursday, but the chances are that the market will pause and consolidate for a few days very soon. If the stop is too tight we risk getting nicked out too soon. So we will keep it well back for now, still being guaranteed a decent profit. Once the market has consolidated and left behind a new swing low, then we will ratchet our stop up again and just see what unfolds from there…”
- When a market goes parabolic its time to beware
Now it is time to reverse that recommendation and tighten the stop right up close to the market.
This is how this has been unfolding:
The first retracement held well above the mid-point of the expansion day that we used to provide our first wide trailing stop location. As the trend continued the stop could have been slowly ratcheted up still keeping it well away from the market.
Now the market has gone parabolic and we need to rethink the strategy again. The first thing to know about a market that looks like this is that the biggest part of the move may well still be in front of us, as incredible as that might sound! Once a market starts going parabolic it can really accelerate hard. But when a parabolic move ends it usually ends spectacularly in a massive V-reversal. You do not want to be holding the position when that happens as the down move can be at least as violent as the initial move up.
So we would like to give this a little bit more chance to show us whether or not it has more to give to the upside, but we don’t want to be holding on once this swing has ended. Overall we have to remember we are traders here to make profits. If you are still holding this you have an enormous unrealised profit under your belt. You have achieved the almost impossible task of spotting and catching an outlier. So first and foremost you must hold onto that profit. The market will take it back from you if you don’t grab it!
Now the strategy is to lock in this outsized profit. There is still an outside chance that this market will continue to explode higher, so dont just exit but do tighten that stop right up tight to ensure any give back is only a small percentage of your open profit. A true parabolic market will keep making a higher high and a higher low every single day until the end when you dont want to be holding the baby any longer. So you can now trail a stop right up to yestreday’s low each day that a new high is made (i.e. ignore inside days). At some point, maybe today, you will get taken out and you will bank one of the biggest profits you will make all year. At the same time you are still giving yourself the chance to increase that profit even further.
An awful lot can happen in a day from this point on. So now is definitely the time to be on your toes.
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Copyright © Simon Townshend Ltd 2009, all rights reserved
Pound hits the buffers
For 7 months now we have been watching this rally in the Pound. It has been a very clean and well behaved move. But now it looks like it has hit the buffers. Let’s take a look at all of the coincidental factors conspiring to end this party.
- Daily Chart: Four of the last five days were spent with the market braking up and holding above the previous range high, but on Friday it failed and dropped back down into that previous range. This smells suspiciously like a bull trap and if so we can expect expect to see a swift move back down to the 1.58 – 1.60 area as its first port of call.
- Weekly Chart: We closed last week with an S-I-R sell signal on this timeframe. We don’t actually trade this large a timeframe but the signal is just as valid whatever timeframe is being used. The first objective off this sell signal would coincidentally be 1.60 and the second would be 1.54, for what its worth but following weekly signals requires far more patience than I personally have. (Heck I often get impatient with 1 minute charts!)
- Monthly Chart: 1.70 is absolutely bang in the middle of the markets historic range. The GBP-USD has spent 90% of its time in the last few decades in the 1.40 to 2.00 range. So 1.70 is the absolute centre and could be regarded as its “normal” price. Some might also argue that 1.70 represents a 50% retracement of the move down over the last 18 months. Personally I don’t think that carries and real significance, but the 1.70 level clearly does as it is a very obvious resistance area with last weeks high coming within just 3 ticks of the 2005 swing low.
The daily trend is still up, but unless it punches convincingly through 1.70 over the next few days that weekly sell will kick in, supported by the monthly resistance and start to turn this market back down again.
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Copyright © Simon Townshend Ltd 2009, all rights reserved
Follow a plan, whether it works out or not
Summertime is upon us once again; a time when things usually quieten down in many markets and also in our work. So far this summer that is certainly not the case.
I took off the second half of July from normal daily trading activity to concentrate on preparing for our forthcoming S-I-R trading signals service whilst Colin, my good friend and website guru, set about the task of starting to build the site and delivery mechanism needed for this service to operate smoothly and efficiently.
It was a great plan, upon which we both made a start. But like all good plans what actually panned out wasn’t exactly what was envisaged!
Colin’s work got off to a great start. Then the inevitable glitch materialised in the form of the hosting company not setting things up entirely as promised, creating considerable delays whilst they fixed it. Fortunately people like Colin always have a lengthy pipeline of work so he did not lose this time, but our project progressed less quickly that it might have without this external delay.
In my case, just prior to leaving for my hideaway in the French Alps where I planned to have uninterrupted peace to concentrate on my work, I got involved in discussions with a potential new investor. There is nothing new in that of course except that this particular investor has the potential to increase the size of our fund dramatically should his company decide to go ahead with the planned investment. This would be our first (and probably last) institutional investor and anticipating the due diligence process that would follow, I realised that preparing for this was by far the most important use of my time.
So I ended up working like a dog for 10 days and it was very productive. Unfortunately it bore little resemblance to the work I had plannned to do.
I think there is a very real lesson in all of this. There are some wonderful advantages to working in this business, which in my opinion include these very important ones:
- There is no commuting or daily grind to contend with
- You choose your working hours, location and surroundings
- You only work with a few carefully chosen and often part-time colleagues
- The business can be grown tenfold without any change in staffing levels or overhead costs
What other business can offer this? Especially this ability to grow without incurring additional costs, indeed volume discounts if anything reduce costs!
But the downside is that you don’t have the corporate organisation around you to delegate to and your carefully laid plans sometimes get completely thwarted. Personally I think the benefits far outweigh this disadvantage. However, you have to be willing and able to be flexible when such unexpected events derail your plans. This can be frustrating beyond belief but you cant just dig in your heels and say “no” like someone with a conventional job could.
With fixed and limited hours available you have to re-prioritise the items in your “to do list”, which you can be certain you will never reach the end of!
You also have to keep working to a plan, even in the knowledge that the plan may sometimes have to be modified. Just like a trading plan sometimes has to be developed and allowed to evolve in a controlled manner from its original incarnation. With a good plan you have a good chance of reaching your ultimate goals, just not necessarily exactly how you had anticipated getting there. However without a plan you can be pretty sure you wont get there at all.
(As an aside our S-I-R strategy ended July in fantastic form and an updated performance chart has been posted to the website: www.Simon-Townshend.com/trading-signals )
Disclaimer, risk warning and copyright notice apply to all articles published on this site.
Copyright © Simon Townshend Ltd 2009, all rights reserved
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