Long & Wrong

A fresh start demands a healthy dose of cynicism.  I get  bored of  those “earn thousands from home in just a couple of hours” and  ”trading the euro is easy” banner ads so I thought I would add a bit of opposing hyperbole, an imaginary job advert…

Situation Vacant – Retail Forex Trader.

Location  - Home.

Salary – Unlimited (in both directions).

Candidate Profile

The ideal candidate will be looking to escape the routine of working 9 to 5.  They will achieve this by working from 8AM (Sydney) to 6PM (New York).

Some experience of routine work, such as working on a production line, would be beneficial.  The succesful applicant will be required to repeat the same task over and over again without deviation. Although it may take them a few years to realise this.

This post offers a unique environment for the right candidate looking for promotion. There is none. Ever.  It’s the same job on day one as on the day you retire, although the chances of you making it to retirement in this post are so slim that we don’t bother with any pension scheme.

This career is guaranteed to provoke a negative response from friends and family so a thick-skin is required. You may be accused of single-handed destruction of third world economies, gambling with your children’s future or told every day to “get a proper job where you make stuff”. This career is ranked below estate agents and only slightly above international terrorists.

UK Applicants: This post is exempt from minimum wage legislation, you are not guaranteed £5.80 an hour. You are not guaranteed anything, apart from  crippling losses during your probationary period.

Of course it isn’t really that bad. Some days.

I had written previously of the threat to our little money winner (/loser) if a Tobin Tax were to be introduced.  Whilst it had always seemed unlikely, we live in interesting times where anything is possible.  Financial speculators could have gone the same way as steam train drivers, fax machine salesman and honest politicians.

It was therefore an especially pleasant slice of toast and marmalade this morning when the Sunday newspaper contained a story that the chances of the tax being implemented are diminishing.

The prospects of a global tax on financial transactions were receding fast this weekend amid signs that countries were swinging behind an alternative plan to impose an insurance levy on banks.

Both David Cameron and Alistair Darling expressed support for Barack Obama’s proposals to force banks to pay into a fund that would provide compensation in the event of the failure of a financial institution.

Cameron said at the World Economic Forum summit at Davos that he thought a so-called Tobin tax was unworkable because of a lack of international support, but said he would back an insurance levy if he became prime minister in this spring’s election.

The full article, from The Observer, can be found here. I’m all in favour of taxing banks with an insurance levy, just leave us small-time traders in our garden sheds (is that just me?) well alone.

I’m posting this ‘live’ so a fuller explanation will probably follow but I just got caught on the wrong side of this…

The most liquid market in the world looks a bit 'dry' tonight.

A number of feeds show the same, no obvious cause apart from a lack of liquidity and/or shenanigans.  The other thing I don’t know is whether to go to bed or wait and sell any rally back to 4260 area.

UPDATE: Thanks to daytrader233 for explanatory comments below. I stop paying attention to the US after 21:30 GMT, I shouldn’t.

CFTC in the US is proposing to limit retail forex leverage to 10 (yes, ten).

If this should come to pass then I am opening a UK-based trading arcade for my North American friends. Yours for $2,137/week. Bangers’n'mash, jellied eels and other British delicacies delivered to desks for only a small charge…

I promised something practical (not philosophical) but the idea-gauge is reading ‘empty’.  I’m just going to have to post a chart. I’ll pick EUR/USD for its universal appeal, I know nobody outside this little island cares about December FTSE.

If you can’t decipher my charts/method/madness then the summary is (for a fixed risk per trade ‘R’, not its real name),

-R, 4.5R, 0R, 1.5R, -R, -R, +3.3R = ~6.3R

Yes, I got lucky with ISM. Yes, I failed to exploit it fully.  Yes, that is a break-even trade even though I campaign passionately against them. Those are just three reasons why I won’t be doing this again, but I was desperate for content.

My first foray into full-on forex (I may be better at alliteration than trading!) was delayed last week.  You tell people about how flexible your trading activities are and then they expect you to be flexible!

So I got up early this morning and have already completed 3 trades, risking one percent per trade. The result? I’m down 3%. A loss, a loss and (for the less mathematically inclined of you) a loss.

So I’m hugging my spreadsheet like a child hugs its favourite soft toy. It soothes me by telling me that the chances of 3 losing trades in a row are ~20%. It doesn’t tell me why I missed my EUR/JPY entry by 0.1 pip and that would have made me 1.8%.

Time to clear the mind and wait for the next trade to come along. I’ll have a cup of tea as well, but not the posh stuff, I’ll save that for more profitable times. 

There has been coverage in the British press this weekend of the renewed interest in the introduction of a Tobin Tax, a tax on cross-border currency trading to discourage short-term speculation. It also looks set to be discussed at the upcoming G20 even if the prospects for global agreement are slim.

To save you the trouble I googled my way around the subject and tried to avoid the inevitable bias by excluding results that include terms like ‘eat the rich‘ at one end and ‘meddling commie bastards‘ at the other!

The most reasoned, detailed, readable  and apparently unbiased guide I could find was a 2003 paper (pdf file) by researchers at The University of Hannover. This examines the affect the tax would have on the forex market (some of the more evangelical proposers of the tax seem to assume there will be no effects, apart from a massive tax take from an unchanged fx market).

I’m sure you will read all of the paper for yourselves (it’s actually remarkably readable even without an economics degree) but some key points are summarised below. All interpretations are my own.

• Taxing short-term currency speculation out of existence, or at the very least dramatically reducing volumes, will decrease overall market liquidity.  Reduced liquidity is associated with higher volatility, a very unwelcome side-effect.
• Contrary to popular belief, asset managers have the greatest effect on short term currency rates, but they are unlikely to be affected significantly by the proposed tax.
•  A low tax rate is required to discourage tax avoidance and to maintain the smooth operation of the interbank market. Tobin initially mentioned 1%; 0.1% or less is now a more commonly discussed figure.
• However a Tobin Tax of just 0.1% could reduce the interbank market by 80%; liquidity would be crippled and volatility increased.
• The fundamental problem is that a low-rate does not discourage speculation, whereas a high rate markedly reduces liquidity.

 So the problem is not simply the added spread/commission (a calculation you could do on the back of an envelope) but the effect of the tax on the market, in particular liquidity and the knock-on effects and costs. Being a paper by academics with greater concerns than my shed-based operation, they fail to conclude that a Tobin tax would lead me to turn off one of these monitors, if not all of them.

My personal view is that taxing an activity rather than the profits that it generates makes little sense.  As financial speculation offers little value to society  then I  favour a hypothecated tax on profits. This could be dedicated to solving the same problems that many people hope the Tobin Tax will address.

Has any one made it this far? I’m impressed. A potentially depressing way to start the week, sorry.

In one of those experiments that only bored psychologists can possibly dream up…

Vohs, K.D., Mead, N.L. & Goode, M.R. (2008). Merely activating the concept of money changes personal and interpersonal behavior. Current Directions in Psychological Science, 17(3), 208-212.

… participants were sat in the same room as a PC displaying one of 3 screen-savers. One showed a blank screen, a second showed animated fish and a third showed images of falling money.

When asked to pull a chair over to get acquainted with the experimenter, those who had seen the money screen-saver chose to place their chair further away than those who had seen the other two.  Just the incidental sight of money is enough to increase social separation.

In a similar experiment participants were asked if they would prefer to work alone on a task or with another.  Those who had seen the money screen-saver overwhelmingly, by a factor of  4.5 to 1, chose to work alone compared to those who saw either the fish or blank screen.

If a brief glance at an image of money can have this effect then what does staring all day at these forex charts do to me?  I’m almost certain that it doesn’t have any detrimental effect on my mental outlook but wish you would all just  f*** off and leave me alone.

I have spent the last year trying to learn how to trade FX as well as the index futures.  This was, entirely accidentally, a smart decision as I was hopelessly naive about how easy it is to trade indices. In the wonderful days of the credit crunch, and the big intraday trends that generated, I was doing well.  My results now, although profitable, are a lot less impressive.

Throughout that learning process I have been collecting data and have now settled on the 3 pairs that I will concentrate on. A lot of this decision is a quantitative one (I have enough charts to bore even me)  but I think there is also a qualitative argument that supports these 3. 

EUR/USD 

GBP/USD                   

EUR/JPY

Here are some of the touchy-feely reasons that support the data in the spreadsheet,

• 3 pairs seems to strike the right balance between seeing sufficient candidate trades per day but also being able to understand some of the nuances of each particular market. It also means that adding these to the index futures I can just about cope with my current ‘screen estate’.
• These 3 pairs include 4 currencies (EUR,USD,GBP,JPY) and almost always guarantee some tradeable volatility each day.
• I am wary of EUR/USD as although the spread is tighter the moves are smaller and there is probably some clever analysis that would prove that the spread is actually quite large relative to the price changes. However, I am wary of trading any FX without keeping an eye on this pair which makes up more than a quarter of the market.
• I have dropped USD/JPY partially because the spreadsheet told me to (and it has a very stern voice that is also always telling me to label my columns) but also because post credit-crunch it is about as exciting as watching paint dry.  Big moves in USD/JPY are so closely correlated with indices anyway I should get a bite at any action there.
• I am only taking tens of pips per trade so it crazy to give the bulk of any profit to the broker. 8 pips spread on GBP/JPY anyone? Thought not.
• I don’t normally believe ‘forum wisdom’ but, just as people claim, GBP/USD really does seem to pay more attention to the kind of support/resistance levels that a simpleton like me draws.  Month after month it is my most profitable/least unprofitable pair

So from the start of the new quarter  I begin trading FX ‘in anger’ (anger=1% risk per trade of the sort of money that wouldn’t buy a new car but would buy Solfest’s motor a few times over). Wish me luck.

I thought today had one last trade in it and went long e/u at xx260.  I was hungry though so headed off for dinner and left orders at xx254 and xx281.

I think I might have been buttering bread when all hell broke loose.  Had I been at the screen I would like to think I would have held off until xx350 and my FX account would have grown by 10%. I know trading is full of ‘what ifs and if onlys’ but I still think it was an expensive meal. Either way I wanted to share the pain here.