Tuesday, February 5, 2013

Confessions of an FX Trader: Volatility Reigns

Trading is about what you don't lose, not what you make.  
                                                                        -- Market Maxim 

The awesome volatility on the FX market has meant that some traders have made a lot of money in the past few weeks.  It also means that scores of speculators have also lost their shirts and may have to hang up their hats entirely.  My sincere condolences to the Euro bears.  I am still looking to fade the pop, given the poor underlying fundamentals, but it will take a monumental shift in the overall tone of before I will be short EUR again.   Right now, despite poor growth and lingering debt problems, the break up of the Eurozone is being 'priced out' of the market.  In short, the dissipation of this tail risk is causing the Euro to surge even as the economies that underly it continue to struggle. 

New information being priced into the market means volatility. Several major pairs have been moving ~2 percent per day.  A quick back on the envelope calculation will reveal the staggering profits (or losses) to be realized in such a market.  A 100000 unit long position on EUR/JPY, purchased at yesterdays low of 124 and sold at today's high of 127.41 would have yielded single session profit of $3648.7.  Given that this position could be initiated with 50:1 leverage, or by putting up only $2000, that's a 12 hour return of roughly 160 percent.  

It's hard not to sit in awe of these numbers, especially when you have the margin available to theoretically make these trades.  My only consolation is that nobody is a superman able to perfect time the market, calling the day's highs and lows, and betting everything on them.    

For my part, I have had my ups and downs and taken my licks.  I grudgingly booked a 300-pip post Draghi loss on a short EUR/USD position in early August.  True, I could have hung on and found a slightly better exit point, but if I had been unwilling to admit that I had been wrong on the Euro, at least in the short to medium term, the dreaded margin calls would have come in the late fall.  I ended up walking away with a slight profit for the summer on my short EUR activity.   Making the money was the easy part, any fool could see things deteriorating in the Eurozone in June and July.  Where I went wrong was not being able to avoid losing my profits when the market shifted.  

My willingness to admit defeat allowed me to move on to other deals. I was able to pick myself up and rebuild my Empire.  I went back to basics, taking cautious positions mainly long MXN, and made most of my money on positive carry. Since then, I have jumped on the short JPY bandwagon, and even went long EUR/JPY a few times.  My entry exit points have not been perfect by any stretch, but I have locked profits and continue to earn an excellent return relative to stocks or other assets.  It's fun at times fantasize about what could have been, if positions had been bigger, and timing been better.  For it is in our dreams that fortunes are made.  And lost.  
  

No comments:

Post a Comment