Sunday, May 18, 2014

Dollar – Yen could go either way | The OmiCronFX attitude to risk

For some time now it has been almost accepted wisdom in the Forex market that the USDJPY pair is due for another rise, based on continuing weakening of the Yen as a result of established Japanese monetary policy, and the continued tapering of QE in the United States.

The pair has been undergoing a period of consolidation on the back of low volatility in the market in general, and participants have been waiting for the rate to break to the upside.

Now all bets are off. Annualised GDP growth in Japan, according to government figures last week, has achieved a rate of 5.9%. This is a stellar performance and must constitute a strong incentive for the central bank and the government to make at least some adjustments to the policy of accommodation they have been following for more than a year. Very early on next Wednesday morning (GMT time) the BoJ will announce its latest interest rate decision. While no concrete change to the rate is expected, there could be comments made that would have the effect of pushing USDJPY below the strong support that exists in the 101.318 area.

There is a counterargument to the above. Consumer anticipation of a sales tax rise which took place on April 1st, of 3%, resulted in a rush of purchases of durable goods in Q1 of 2014. This would have had a one-off effect on the figures published. Perhaps the Central bank will wait for this to be flushed out of the system before making concrete moves or even comments.

On a technical basis, price has just pierced the 200 day Simple Moving Average (see chart above). If it now breaks below the horizontal support as well, and stays there, it could be a case of “watch out below”.

The OmiCronFX attitude to risk

In 1987 Larry Williams won the World Cup Premiership of Futures Trading. According to his entry on Wikipedia, he “turned €10,000 of real money into over €1,100,000”, for a profit on equity employed of 10,900%, over a 12-month period.

One wonders if such a story is a benefit or a curse to aspiring traders. The record clearly shows us that well over 90% of new traders lose money, and a great number of those get totally wiped out.

Here at OmiCronFX we do not aim for such performances.

While we agree with “Black Swan” author, Nicholas Taleb, when he says that the Normal Distribution curve, also known and the “Bell Curve” and so beloved of statisticians, does not reflect real life, nevertheless the terminology used by stats practitioners can be of assistance in describing what goes on.

Using straightforward, tried and tested risk reduction techniques has the effect of reducing variance in the distribution of results. This would tend to narrow the bell curve, meaning an absence of exhilarating extreme wins, but also none of the debilitating losses that precede and / or follow them.

And once that is made to happen a lot more can be done. The curve can be skewed, so that losses in general are diminished while wins are enhanced. In addition to a policy of robust risk management, this can be achieved by the strange notion of indulging in work: the work of research on the fundamentals, gaining familiarity with technical indicators, especially support & resistance and moving averages, extensive study of price action patterns on historical data and in getting to know the characteristics of the different currency pairs - becoming familiar with their personalities, so to speak. It also helps if you can have the assistance of algorithmic “power tools” that allow price to be monitored and trade entry signals to be recognised and acted upon, and the all-important profit retention and loss reduction actions applied automatically.

We do have an inspirational figure, but it is not the winner of the 1987 World Cup Premiership of Futures Trading. It is Ed Thorpe, founder and operator of Princeton Newport Partners. In his book, “Fortune’s Formula”, William Poundstone tells in detail the story of how Thorpe’s fund, through the agency of ultra-careful selection and management of investments combined with early algorithmic techniques, was able to  achieve annualised returns of over 15% after fees for an extended period of years, using a market neutral strategy. This meant it was able to be profitable even in those years when the economy was in decline and / or the stock market was crashing.

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