Jan

18

 "Three Card Monte Scam Artists Return to Midtown"

The Swiss National Bank (SNB) in a way played a good game of 3 Card Monty the past few years with market participants. The winning card was where the rate was going to be. On September 6, 2011 the SNB set a peg for the EuroSwiss rate at 1.2 when prevailing market rates where approximately 1.1, a depreciation of the Swiss Franc of about 9%. Between September 6, 2011 and January 15, 2015 the EuroSwiss rate traded between 1.20 and 1.2650, a roughly 5% range. On January 15, 2015 the SNB removed the 1.2 floor and at the extreme the EuroSwiss market rate went close to .8500, a move of about 30%. Who played the game? Who controlled the cards? Who were the shills? I could not help but recall my own adventures in 3 Card Monty and loss of a $50 bill as a student playing Holden Caulfield in Times Square circa 1983.

What trading lessons might there be in the move by the SNB and subsequent moves in markets? How can these lessons be embodied to provide a future playbook of offensive and defensive plans? Following some delirium from trading the markets the past few days some clarity came to mind on some runs the past day or two. First, some empathy to all have may lost in the market this past week. One close friend of many years described the feeling just 30 minutes after the SNB decision by saying " I feel like I just got my leg blown off, I can barely think straight".

10 rules, lessons, and examples I have found effective and illustrative.

1. Find and trade markets where your edge is the greatest.
2. Avoid markets were the probability of rule changes and lack of transparency is present.
3. Think of and imagine market scenarios others fail to.
4. Fundamental macroeconomic forces will ultimately prevail.
5. Trading time frames and profit objectives though must coincide with what the market is giving you at any one time.
6. Quantify risk with a multidimensional perspective, not just by one or two measures such as VAR or a price stop.
7. Learn from history. Jay Gould and his attempts to corner the gold markets in the late 1860's. The Russian default of 1917 and 1998. The European Rate Mechanism break up. The Tequila crisis of 1994. The Asian financial crisis.
8. Be deadly serious, as Gichin Funakoshi said "You must be deadly serious in training". If you have a position make it a meaningful size and monitor it carefully. I recall many comments from fellow traders the past few years saying something like "I am long EuroSwiss just to have some on but not really watching it."
9. Define and use a trading methodology that incorporates a process and framework that works for you. Inclusive in this should be a daily routine that includes diet, exercise, family time, etc.
10. Seek out catalysts for CHANGE in markets. Where are the forces, in a Newtonian like law of motion, building up the greatest to cause a CHANGE and movement in markets?

What further elaborations and examples might there be?

Stefan Martinek writes: 

I was thinking about it recently. Great list. I would only add: (a) Be prepared that liquidity in any market can disappear regardless of historical data or experience; (b) Mind counterparty risk.

Anatoly Veltman writes: 

Excellent lessons from John. The dilemma here is of common variety, though. Similar to an individual smaller stock: you're either an insider, or a mark. In case of the SNB last few years: you were either in bed with the devil, or you were exposed to a chance of a -100000% annualized loss on any given random day
 


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