Neither Tech nor Macro

From massive easing to massive rioting

Let’s summarize where we are with the runnings, pendings and other the intentions posted here . Globaly these trades seems against the prevailing sentiment so far and tactical trades shouldn’t be played against it. Anyway Why this Risk off amplification since tomorrow night GMT? I always want to know what’s behind a significant unexpected move. Believe me it’s not easy. First we were told by Reuters the Risk is plummeting because of Fed Plosser slamming QE3, meanwhile Dowjones was stating it’s because a big Riot in Madrid. All this just after the Draghi, well received speech in Germany that pushed the market a bit higher and among rumors saying that some big assets managers (real money) are positioning on the bid for the euro. Generally it often takes hours to know what is behind an unexpected move, or what is the main reason among many. One thing that we know today is that the Finn, Dutch and German finance ministers are asking their governments not to allow the ESM to bailout the banks. This one is like returning in the same uncertainties as before and is probably the catalyst of this panic. Politics is stronger than the market, and this is enhancing the Idea that the EZ problems even when strong monetary solutions are deployed, will always be confronted to political walls. In other words the idea that Euro is doomed. This can reestablish the EZ tail risk in the market, hence destroying precisely the idea I have based my trades on, that is, real money re-balancing its portfolio.

So where are we?

EURUSD long: I am already hedging as I mentioned in week 39 intentions the eurusd long with a put at oct 18 1.2900 strike limiting the risk to -95p. I didn’t do this because of this new outcome, rather because as I said I’ am very badly positioned, like in the middle of the range.

EURJPY long: The second order at 100.05 (see here) is filled, and I am holding this position.

ES: Purchased SPX Oct18 call 1430.

EURCHF: Still holding at +55p. This one is a Core position, and I am monitoring it as the signal if it plummet to 1.20 that te EZ tail risk is back. No need for a stop, since the SNB floor at 1.20.

Why?: The EurUsd is a miss but I want to give it more time, although limiting my risk. For EurJpy I still believe in BOJ intervention, mainly in this risk off sentiment. And the downside is limited on all the JPY pairs. For the ES, I still think that QE money has to be spent, and a November call at this level is for me a nice opportunity.

Risks to these positions:

We are starting to slowly shifting focus from QEs to the US fiscal cliff, and this can amplify the risk off. But anyway all my risk is limited by the use of options and for the JPY by the BOJ threat.

It’s in these moments, where you find yourself suddenly positioned against the sentiment with the big picture shifting slowly against your views, that you will know if you are made for the job. Let’s see.
 
Hedging; the way to go.

Most of us, at the beginning of their learning curve, see the use of stop loss orders like the trickiest and frustrating part of the trading activity. Hence beginners stop loss is often greed driven. What I would like to say about that, without playing the Guru is that the use of a market order (all pending stops become market orders when triggered) to cut losses is not the most optimal way to do it and by far the most expensive. But let start by the situation where you have no choice, because it’s the only tool provided by your broker , as it is often the case with those specialized in FX spot. The best usage is to adopt some tech swing trading strategies on daily, where you position your stop behind big tech levels and not far from your entry level (an ATR percentage you’re comfortable with). This allow intraday liquidity levels to act as a shield protecting you from local volatility due to news releases or liquidity search (mistakingly called stop hunt). Of course the swing trade strategy must be used in sync with your market views if you’re a macro trader. One must know that it is way easier to see or anticipate a directional bias (North,South, Range) than to predict the amplitude of its local volatility. The upper/lower boundaries of an established range or a consolidation area often cap this volatility by providing the needed liquidity. Breakouts beyond them needs either a change in the sentiment or a shortage in liquidity, therefore timing the position is key. In other words avoiding entries ahead of news releases and during meetings or important events and during thin market. More technically a 30% ATR above a rounded number near a boundary has proven to be very efficient if you use the good timing.

The best way to protect your trades remain of course the use of options indexed on your instrument. The very big difference is:

1: whatever happened you know your maximum risk. It’s not the case with a stop order since it is becoming a market order when triggered, therefore suffering slippage. For example that EurChf and its floor at 1.20. Below that level its a liquidity desert, no counterparts if you have a stop there. And if it is deeply pierced by some panic sell-off you will not be filled if SNB decided to stay sidelined, or as it happened already when the banks mandated to do it were late to act . This extreme scenario can wipe out any account because of the slippage. More frequently a stop triggered during a thin market can suffer significant slippage and it happens everyday. If your platform allow you to put a limit order to average/close a position better go that way.

2: The same maximum risk is cheaper with a call/put hedge. For the reason that an option have a time value that can reduce the cost of the risk taken if it is closed before expiration month.

3: The time window allow your position to breath, to unfold and turn your way, mainly if your trade is based on solid macro analysis, by neutralizing any significant volatility against your spot position. To achieve the same goal if you don't use options you need to trade without stop accepting big drawdown and subsequent margin calls.

4: Some option strategies can drastically reduce the risk taken on the spot. It’s out of the scope of this thread . But many other threads on this forum talks about options way better than I do

Conclusion: To those not using them, go options to hedge your position; its easy and cheap. . Forget definitely to hedge the spot with a correlated pair, it’s a dangerous game. If you don’t trade intraday , or if your trading is global macro based, it’s even better to forget the spot and use options only.
 
The Daily view, I wouldn’t sell the euro.


EurUsd

Beside being already long on a longer term view; I wouldn’t sell the Euro in this “where are we going” sentiment. The downward pressure is high, catalyzed by the Spain rising yields and the 3 core finance ministers (Finn, Dutch, Geman) reshuffling the ESM cards about banking sector direct recapitalizations. The uncertainties from Spain whether asking or not for a bailout will not last, and I see Spain officially asking for help after Rajoy’s budget is voted. The 3 finance ministers trying to swap Draghi’s OMT vs ESM have no chance to be accepted even in Germany since the risks to German economy are growing. In terms of strategy, I am going to wait and see if this current pressure is going to push the price lower so we can reach nice levels to bid. This can play nicely if the 200DMA at 1.2824 is broken triggering a sell-off til the 1.2750 area. but we can expect BIS buying massively at the 200DMA level and maintaining the price around it until the Spanish bailout decision is revealed. Alternatively we can see prior to that the market starting to price in a positive outcome from Spain pushing the price above 1.30, hence I wouldn’t sell the Euro.

AudUsd

Between China QE’s and an anticipated RBA 25bp rate cut, this one has nowhere to do but range. Although we don’t know yet the south boundary, like 1.0330 or lower . I was bearish on AUD but exited the trade seeing the technical behavior of the pair explained here. Now I am focusing on the RBA Oct 2nd decision and think that no cut will be highly bullish because we are adding QEs (China) to QE’s (US, EZ) while maintaining a nice rate for the carry trade. A 25bp cut will probably have the same bullish result since it’s already priced in. A cut of 50bp or more would surprise and make the carry trade leaving the pair but no for too long since there is no real other alternative to carry. So my views on AUD are changing and for now neutral I can easily become bullish.
 
AudUsd long, tactical for now.

Seeing the growing rumors about big China easing and the next 25bp rate cut already priced in. Knowing that US QE money has nowhere to go but in risky assets and also seeing that techs are playing ping-pong inside the current range. I have decided to enter long ao AUDUSD targeting 1.06 area. For now this trade is tactical; but after the RBA decision on October 2nd, it can become a core position. You can see on the chart the tech levels where i expect some turbulences to which we have to add those from the EZ mess. I used a vertical bull call spread showed by the blue lines on the chart. On the spot I would’ve entered after the Spanish presser about the 2013 budget with a stop at 30% daily atr (30days) shielded by the rounded 1.04 level and the 50% fib.
Forgot to mention the big techs who can't keep from fading the legendary 80.00 of the DX (correlation).

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I just have to say that I appreciate your sharing this knowlege.
Concepts on weekly preperation, liquidity/levels, local volatility (not precisely sure what this is) and hedging , along with macro insights have been helpful. Thanks.
 
Quote from fxintruder:

EURJPY long @ 100.05 /status: tactical, /Stop : 99.60 /Target:102,00

Add-on at 100.70 (buy stop ).

I was a bit late on this one. Initially I decided to look at a price around below 99.50.00, But finally I took 100.00 targeting something around 102.00. I based that initial entry at 99.50 on the idea that a really bad German IFO number could push the price near that level, and some specs would help it to get there in search of liquidity (mistakingly called stop hunt). The drop isn’t deep enough so far (may be during Asia) so I have decided to look at 100.05 with second buy stop @ 100.70 The latter will act as an add-on or an initial entry if the first is not filled. In terms of money management it’ s the same size split in 2.

Why long?

I think that the BOJ jawboning is not going to help the Yen vs the USD. But it will make it vs the Euro, with this one probably supported by global inflows due to portfolios diversifications. (see previous posts on this). The Idea is quite simple: Real money will need sooner or later to buy the Euro to diversify its exposition to risk; BOJ is doing what it can to weaken the Yen. So we have two currencies opposed by their likely directions providing in my view a good opportunity. I also keep in mind that I had last week a trade based on BOJ stealth intervention after the US QE that didn’t happen; plus I was placed at a very bad level cos I didn’t wait for some news release to clear the path. This time, I was aware of the Ifo release and used it to enter that low even tho I was expecting something near 100.00.

Risks to the plan.

1:Rumors or news about the rejection by the Spanish government of a bailout; rejection or delay after October.

2:Friday Japanese Data not soft enough to amplify BOJ jawboning.

3: Yen is so versatile because of its real safe haven status that it is often moving on his own despite all the market expectations or BOJ interventions.
More...

Do you remember that trade posted quoted above.

The 2 orders forming one position in size were filled. But what is important is to see on the chart is how the price was limited on the downside around the 100.00. We had several incursion below that but each time they were brought back around that level. This because of the BOJ jawboning and it’s an example of a tactical trade solely based on the hypothesis of a central bank answering to another central bank. The real push hasn’t occurred yet hence I still maintain the 102.00 as target area. A mistake in positioning was made in this trade, I didn’ take into account the UsdJpy liquidity distribution, which by correlation would have shown that the limit historically accepted by the BOJ wasn’t reached yet. But I thought that the US QE was so big this time, that the market will not wait for the BOJ to intervene before selling.

This morning we had some mixed figures from Japan and the price is mainly driven by the japanese half-year closing flows. Anyway I am convinced that the BOJ will announce sooner than later easing measures of the same scope as those from the Fed and the Ecb. But the Yen is structurally a safe have currency and that’s why i don’t see it going above 102.00 with the market starting to look at the next risk-event, that is, the fiscal cliff.

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USDJPY new long.

This one targeting the 80.00s is a good example of what seems a good timing so far; that is: half year flows , Boj jawboning near the previous price where it intervened in last June.
Since I am already positioned on EurJpy with the same intentions, I have locked this one above BE, to avoid correlation risk.

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QE’s not enough to boost the risk appetite. Several of my running positions opened after the ECM / FED announcements, were based on the idea of a weaker USD (not vs JPY tho ) and structural shorts re-balancing their portfolios after the Draghi put eliminating the EZ tail risk. This hasn’t happened so far. But as I said last week I am giving it more time and close targets, 1.33-34-35 for a hedged EURUSD long, 1.06 for AUDUSD with a bull call spread option.

On the other hand the long USDJPY posted here, based on BOJ jawboning is rather doing well. The strength of this trade is mainly based on a very good timing that allowed a well shielded (by BOJ) entry level, that is 77.45 targeting the 80.00 area and not further.

The EURJPY averaged long posted here, is now in positive territory and is going its way.

The core EurChf long @ 1.2035 posted here, based on the potentially eliminated EZ tail risk and the ridiculously overcrowded 1.20 SNB floor, is as planned going slowly its way, though it pulled back from 1.2190 and get stuck just below 1.21.


Week #40

This week is heavy on the news front and I am already positioned on several assets. I think I am going to trade the news on the spot like the RBA meeting (if I am not in bed) and the NFP. More on this later.

One Idea is starting to grow in my mind about GBP pairs. I am thinking to wait for some catalysts to short it heavily vs USD and EUR, like from 1.62. I will develop on this when I am really convinced that a GBP sell-off is about to begin.
 
EurJpy UsdJpy :It’s all about timing
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One, the UsdJpy here, is well timed and not even need a stop, since it’s shielded by the BOJ.
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The other here, taken at 100.7 then added to at 100.05 was badly timed, how stupid it was knowing that the real entry signal would be given by the UsdJpy (lack of discipline).
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A good timing is the first condition to met before entering a trade, whatever are the incentives. One must take into account the upcoming news and the liquidity distribution, the rule is : always looking for a better price. When the drawdown is substantial like the one on EurJpy and you’re still confident in your trade, hedge it or close. Don’t average it as I did, unless it stays inside your accepted risk.
 
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