The Art of Currency Trading: A Professional's Guide to the Foreign Exchange Market (Brent Donnelly, 2019)

-


Type of alogrithmic strategies

  • Data trading: economic data.
  • Market making: earn spread.
  • Coorelation: compare with other market.
  • Arbitrage: profit from disparities.
  • Trend following: pullbacks, moving average or breakouts.
  • Mean reversion: go against trend.
  • Gamma trending: generate income on the excess cost.

Type or orders

  • Risk price: bid price.
  • Stop loss order: risk management.
  • Market order: standard order.
  • No worse than price: stop or limit.
  • Two-way price: both bid and offer price.
  • TWAP: time-weighted average price.
  • Iceberg orders: limit order in wholsesale.
  • Dark pool: wholsesale matching.
The players

  • Banks.
  • Coporations and hedgers.
  • Hedge funds.
  • Discretionary/macro funds.
  • CTAs (Commodity Trading Advisors), systematic and model funds.
  • Real money.
  • High-frequency trading (HFT).
  • Central banks.
    • Policies is a major driver.
    • Moral suasion for currency preference.
    • FX intervention on currency too high or low.
    • Diversification: hold or protect own currencies.
  • Retail traders.
Groupings
  • USA
    • The dollar smile
      • In good time or bad time, USD will go up because of greed and fear.
      • In normal time, USD will go down. 
  • Major pairs: EURUSD / USDJPY / GBPUSD / AUDUSD / USDCHF / USDCAD
  • European: EUR / CHF / SEK / NOK / DKK
  • Commodity: AUD / CAD / NZD / BRL / ZAR / CLP
  • Skandies: SEK / NOK / DKK
  • Emerging (Asia): CNH or CNY / KRW / SGD / INR / MYR / PHP / TWD / THB / IDR
  • Emerging (Europe): ZAR / TRY / RUB / HUF / PLN / ILS / CZK
  • Emerging (LATAM): MXN / BRL / CLP / COP / PEN

Important timing, in SGT

  • [0755] 0855 TYO, Tokyo fix.
  • [0915] 0915 SHA, China fix.
  • [1400] 0700 LDN, London open.
  • [1900] 0700 NY, New York open.
  • [2015] 1315 LDN, ECB fix.
  • [2030] 0830 NY, US economic data.
  • [2100] 0900 NY, NYMEX open.
  • [2200] 1000 NY, US economic data.
  • [2200] 1000 NY, Option expiry.
  • [2230] 1030 NY, Wed, Department of Energy (DoE) data. 
  • [2300] 1600 LDN, WMR benchmark fix.
  • [0000] 1200 NY, Bank of Canada noon rate.
  • [0230] 1430 NY, NYMEX close.
  • [0300] 1500 NY, CME close.
  • [0300] 0700, WLG, Mon, market open.
  • [0430] 1630 NY, Tue, American Petroleum Institute (API) data.
  • [0500] 1700 NY, Fri, market close.
    • 2 hours before the marekt will be slow.
  • [0500] 1700 NY, twilight zone where 1 hour of reduced manpower.

Fundamentals

  • Global growth.
  • Commodity prices and terms of trade.
  • Fluctuation in global risk appetite and risk aversion.
  • Geopolitics
  • Domestic drivers
    • Monetary policy
      • Interest rates.
      • Balance sheet size.
      • Growth.
      • Inflation.
      • Central bank perference for weak or strong currency.
    • Capital flows
    • Trade and account balance.
Economic data

  • USD
    • Nonfarm payrolls (NFP), 100%, 1st Fri monthly.
    • Initial claims, 60%, Thu.
    • GDP, 100%, quarterly.
    • Core personal consumption expenditure (PCE), 40%, quarterly.
    • Consumer confidence, 70%, mid-monthly.
    • ISM manufacturing index, 80%, 1st business day monthly.
    • Consumer price index (CPI), 60%, mid-monthly.
    • University of Michigan Confidence, 40%, monthly.
    • Durable goods orders (ex-transportation), 60%, monthly.
    • Home sales, 40% - 100%, monthly.
    • Industrial production, 60%, monthly.
    • Retail sales, 70%, monthly.
    • Chicago PMI, Philly Fed, Empire State, 60%, monthly.
  • EUR
    • Germany ZEW survey.
    • Germany IFO survey.
    • Germany GDP.
    • Germany factory orders.
    • Germany IP.
    • Germany inflation (core CPI).
    • Germany retail sales.
    • Euro area PMI (composite and manufacturing).
    • Eurozone inflation (core CPI).
  • GBP
    • Retail sales.
    • CPI.
    • GDP.
    • Claimant count change (US initial claims).
    • Manufacturing production.
    • Average earnings.
    • Manufacturing and non-manufacturing PMI.
    • Exports.
    • Current account balance.
  • Japan
    • Tankan survey.
    • Trade balance.
    • GBP.
    • Machinery orders.
    • Industrial production.
    • CPI.
  • Canada
    • Net employment change and unemployment.
    • CPI.
    • Retail sales.
    • GDP.
    • Ivey PMI.
    • Building permits.
    • Manufacturing shipments.
    • Bank of Canada business outlook (future sales).
  • Australia
    • Net employment change.
    • GDP.
    • CPI (RBA trimmed mean).
    • Retail sales.
    • Trade balance.
  • New Zealand
    • Employment change.
    • Unemployment rate.
    • GDP.
    • Retail sales.
    • CPI.
    • Trade balance.
  • Norway
    • CPI.
    • GDP.
    • Retail sales.
    • PMI.
  • Sweden
    • GDP.
    • CPI.
    • Industrial production.
    • Retail sales.
    • Manufacturing confidence.
  • Switzerland
    • CPI.
    • GDP.
    • KOF leading indicator.
    • Manufacturing PMI.
Indicators
  • Support and resistance
    1. Large limit orders.
    2. Self-fulfilling prophecy.
    3. Option-related.
    4. Round number bias.
  • EMA
    • Using 20, 55, 100, 200, 500 EMAs.
    • As a guide for entry, take profit and stop loss.
  • Momentum
    • MACD, RSI, Parabolic Sar
  • Candlestick charts
    • Shows market indecisions.
  • Ichimoku
    • Great for USDJPY pair or any JPY cross.
  • Market profile.
    • Financial data.
  • Fibonacci numbers
    • If you look hard enough, you can always find a tech level to justify a bad trade.
    • "It's a big level" is not a good enough reason to put on a trade.
    • No mo' FOMO. Never worry about missing it. There will always be another trade.
Placing trade
  • Rangebound
    • Difficult to trade.
  • Trending
    • Pullbacks: identify using moving average.
    • Breakouts: flags, pennants, triangles.
    • Continuation.
  • Reveral
    • Double or triple tops and vice versa.
Deadly setup

  1. Slingshot reversal
  2. Shooting stars and hammers
  3. Extreme deviation from a moving average, aka the Deviation
  4. Volume spike at a price extreme
  5. Broken triangle
  6. Double and triple top
  7. Sunday Gaps 

Correlation

  • Establishing a relationship
    1. Does it make sense?
    2. Is it going to continue in the future?
    3. Does the sample consist of both falling and rising?
    4. Is there a 3rd influencing variable?
  • Reliability
    1. FX vs. other currencies.
    2. FX vs. interest rates.
    3. FX vs. commodities (especially gold, oil, copper.
    4. FX vs. equity indices.
    5. FX vs. single name equities and ETFs.
  • Example drivers
    • USD
      1. US 2- ,5- and 10-year interest rate
      2. US equities
      3. Gold
      4. ISM/consumer confidence
    • EURUSD
      1. US/Germany rate differential
      2. Gold
      3. IT 2- and 10-year yield
      4. S&P
    • USDJPY
      1. Nikkei
      2. US 2-, 5- and 10-year interest rates
      3. Gold
      4. S&P
    • USDCHF
      1. US 2-, 5- and 10-year interest rates
      2. Gold
    • EURCHF
      1. DE interest rates
      2. Global risk appetite
      3. Italy 2- and 10-year yield
      4. European bank stocks
    • GRPUSD
      1. UK/US rate differential
      2. Crude oil
    • EURGBP
      1. DE/UK rate differential
    • AUDUSD
      1. AU/US rate differential
      2. Gold
    • AUDNZD
      1. AU/NS rate differential
      2. AU vs NZ equity price ratio
    • NZDUSD
      1. NZ/US rate differential
      2. Dairy prices (MMRA on Bloomberg)
    • USDCAD
      1. Crude oil
      2. US/CA rate differential
      3. CA oil equity (SU etc.)
      4. Gold
    • EURNOK
      1. Crude oil
      2. DE/NO rate differential
    • EURSEK
      1. DE/SE rate differential
      2. SE equities (OMX)

Behavioural finance

  • Extreme positioning
    • The theme is new: new information arises.
    • Major event risk upcoming.
    • Time of year: achieve target or gaining book profit.
    • Positioning clear-outs.
  • Positioning
    • Positions and price usually move together.
    • Positioning lead price to turning point.
    • Positioning can trend for long time.
    • Absolute levels of positioning mean less than the rate of change of positioning.
  • Cognitive bias
    • Confirmation: internalise information.
    • Overconfidence: think they are better than others.
    • Extrapolation (recency): gambler's fallacy.
    • Asymmetric loss aversion: feel more pain to lose.
    • Emotions: greed and fear.
    • Anchoring: hard time moving away from what they believe.
    • Round number: I will be there in 6 minutes vs. 5 minutes.
    • Favourite/longshot: overweight small probabilities.
    • Herding: safer to wrong with everyone than try to be right on your own.
  • Absurb indicators
    • Skyscraper indicator: more skyscrapers are built in good times.
    • The cheer hedge: when people are cheering, go opposite direction.
    • WTF indicator: when people are asking why market move in WTF way are almost certainly they are in the wrong direction.
    • IPO indicator: phenomenally big IPO can move the currency market. 

Trade the news

"Buy the rumour/sell the fact"

  • Trading economic data is too late.
  • Going the other way after the new is released. 
  • High impact news
    • Central bank meeting.
    • Unscheduled central bank actions.
    • Correlated news releases.
    • Sympathy plays.
    • Geopolitical events.
    • Natural disasters. 

How trading evolved

  • Many senior traders have left this trade.
  • More than 60% of the market are being traded electronically.
  • Order slicing/hiding reduces the visibility of large movement.
  • Central bank pegs, bands, caps and floors made the market instable.
  • Fewer strong hands on the buy side.
5 stars trade
  • Fundamentals.
  • Cross-market signals.
  • Positioning.
  • Technicals.
  • Gut feel.
Moving stop loss
  • Good
    • Upcoming event risk.
    • Trailing the stop to lock in profits.
    • Risk management trigger reached.
  • Bad
    • To "survive" a little longer.
    • Didn't notice major technical level before that.
    • Other trades are well so let this be compensated.
A successful trader
  • Finds the balance between risk behaviour and discipline.
  • Thinks independently.
  • Knows their edge.
  • Trades one time horizon.
  • Controls emotion/acts like a robot/self-aware.
  • Implements a consistent daily routine.
  • Happy to be flat.
  • Understands tight/aggressive.
  • Self-understanding and metacognition.
  • Loves trading.
  • Learns and adapts.
An unsuccessful trader
  • Poor risk management, bad discipline, and negative risk/reward.
  • Trading for the wrong reasons.
    • Overtrading, gambling, entertainment, and addiction.
  • To feel smarter than anyone else.
  • Fear of missing out (FOMO).
  • To lose money.
  • Waiting for the perfect trade.
  • Invincibility/overconfidence.
  • Woulda, coulda, shoulda syndrome.
  • Directional bias.
Brent Donnelly's 25 fules of FX trading
  1. Don't blow up. Avoid risk of ruin above all else.
  2. Adapt or die.
  3. Do the work. Read the speechs. Analyse, read, and study.
  4. If you look hard enough, you can always find a tech level to justify a bad trade!
  5. "It's a big level" is not a good enough reason to put on a trade.
  6. No mo' FOMO. Never worry about missing it. There will always be another trade.
  7. Flat is the strongest position. When in doubt, get out.
  8. It doesn't always have to make sense.
  9. Never fade unexpected central bank moves. Jump on them!
  10. Making money is hard. Keeping it is harder.
  11. Successful traders make more money on up days than they lose on down days.
  12. Anything can happen.
  13. Keep a trading journal. Thoughts are abstract and fuzzy. Writing is concrete and solid.
  14. There is a time and a place to go big.
  15. Good traders vary bet size.
  16. It always looks bid at the highs. It always looks heavy at the lows.
  17. You control the process buy you do not control the outcome.
  18. Each trade is a drop of water. The market is an ocean.
  19. Know your edge.
  20. Know your time horizon.
  21. Good traders have a plan. They may not always stick to the plan buy they always have one.
  22. Tight/aggressive wins.
  23. Be flexible. Don't get married to a view.
  24. Do not let random, low-conviction trades kill you.
  25. Have fun. If you don't enjoy it, what's the point?

Comments

Post a Comment

Popular posts from this blog

Kokology Questions & Answers

-
[These are extracts only, to see the full details kindly purchase the original book] Kokology is the study of kokoro (Japanese: 心) which in the aforementioned language means "mind" or "spirit". ... The books were published in 1998 in Japan and became a Japanese bestselling phenomenon. The books were translated and became available in the United States in 2000. Below are some questions and answers for sharing: A Desert Journey Boring class settings, you drifted away and enter the eternal desert... 1. You are riding a camel and you are near exhaustion, what will you say to the camel? 2. Before you die of thirst, a traveler point to you a oasis, who is this person you know? 3. You finally come to your destination which is a town, what is your feeling? 4. After you dismount, another person took over, who is this guy? - 1. What happened when love is lost? 2. Who always help or comforted you? 3. What is your feeling after getting past lost love?...
Read more

Neuro-Linguistic Programming Models Summary (02 of 14)

-
GeneraliSation The The Meta Model generaliSations make explicit the way we summarise and categorise our experiences. Generalisations are basically the rules we use to manage life. There are usually exceptions or counter examples to rules. These rules and categories create self-imposed or company wide limitations. Examining these limitations is a powerful problem solving strategy. By generalising one or a few experiences, we can figure out what to do in a different experience. We learn to drive a particular car, and then use that experience to drive a new one. If we weren’t able to generalise, we would have to learn how to drive all over again. Problem Solving Examining categories and generalisations is an excellent creative problem solving strategy. What are the experiences that come to mind when you think of money for instance? We typically use an emotionally charged experience to stand in for all our experiences in a category. We generalise and categorise all kinds ...
Read more

Neuro-Linguistic Programming Models Summary (11 of 14)

-
The Inner Hero Pattern Beat the drum and let the poets speak. This is the day of purification for those who Are already mature and initiated into what love is. No need to wait until we die! There’s more to want here than money And being famous and bites of roasted meat. --Rumi Life can be lived in many ways. You can make it about making money or winning at all costs, or pleasing other people, or perhaps never standing out. Or you can live your life as a great journey of consciousness, one filled with many challenges and surprises, one that makes a positive contribution to the world. I want to talk here a bit about these different paths, emphasising that the Self-Relations approaches of Generative Self and Generative Trance are especially tools for supporting the latter path. Life as a journey has been described by many people, most notably the mythologist Joseph Campbell.  Campbell (1949; Gilligan and Dilts, 2009) studied the stories of many different cultur...
Read more