Posted on Nov 11th as general indications:
Forex:
US banks closed. Thin market prone to nonsense, though we can see some positioning on AUD pairs prior to employment data due tomorrow GMT. Draghi and Carney speeches apparently were a non event.
We are thinking to build a trade (made of positions) on AUD vs EUR and probably JPY. We already have -25K on EurAud.
About risk:
We never accept more than 10% drawdown on our whole exposure (locked or not). Since the beginning of the Experience we didn't had any.
Nevertheless we can suffer some drawdown when initiating a trade.
Forex is different from stock market, black swan events are structurally impossible. The biggest risk is due to stealth intervention from central banks like we had on CHF with the 1.20 floor imposed by the SNB. That's why we rarely go against the Central Banks (for example right now market is trying to challenge the BOE on the GBP valuation vs the Euro ).
Can we be wrong about the direction:
This would mean that we are not well informed. Of course we can be dragged by some unexpected news (like we get on EurGbp during the BOE super Thursday). But generally taking the wrong direction is being against consensus; we never go against consensus. Sometimes consensus is against central banks policies like on the GBP, these situations generates market nervousness and it's better to avoid them, unless you're well protected elsewhere (like we are on EurUsd).
Can we be wrong about the timing :
Yes and Yes, this is the most challenging. It's less important when already heavily positioned and locked, but when initiating a trade the situation is way more complex. One needs to know how the techs are positioned, how deep the next catalyst is going to impact the price and how much of it is already priced in. We are specs, neither technicians nor fundies, we can frontrun the market only if we are protected or if we know something is looming (barrier Attack for example).
Deciphering information:
This need knowledge in macroeconomics, price formation dynamics, participants positioning etc..
A simple example seen this morning about positioning: Societe Generale EurJpy buy 2M 130 put, KO 135, Sold 2M 135 Call
First I must know that Societe Generale (French Bank) is a big player on FX though not as big as Deutsh Bank or UBS (on Forex). Second 2M is big in terms of FX options volume (x100 exposure). They bought 130 put either to hedge the spot where they are long or they bought them because they are bearish and see the price going below this level in the coming weeks. The first explanation denotes some nervousness, the second a bearish position. An option trader would keep the former explanation because they sold a call at 135 to finance (partially) the puts they bought . This is a spread built on the cost of the 2 contracts, a typical construction of hedgers (collar). We are specs and we analyze it differently.We think that SocGen is buying 130 puts because they have a big barrier at 130 they know will be taken out. If it's taken out they will compensate with the puts given them the right to sell the spot at 130. They also sold a 135 KO because they are now bearish and the premium will also compensate for the barrier they have at 130. They announce the new 135 KO inciting other big players to get KOs at that same level so they are more numerous to defend it (if the price returns there). Here we know that at 135 there will be a big barrier in the coming future. There are tools to know exactly what SocGen is doing, but they are too expensive for the retail trader, therefore one must know how to read between the lines.
