Hardman or Sly Man?


Inside the Cunning Mind
of Yanis Varoufakis

PLUS:
How to find trades
in a
range-bound market


Did you hear about the fisticuffs in Brussels last week?

Apparently, Greek finance minister Yanis Varoufakis, and Eurogroup president Jeroen Dijsselbloem almost had a dust-up.

Tempers flared, Varoufakis shouted ‘liar!’ at Dijsselbloem, and it all nearly spilled over into a physical scrap.

Dijsselbloem was furious at Varoufakis’ behaviour, Wolfgang Schäuble (the German finance minister) didn’t want to speak with Varoufakis, Varoufakis denied everything on Twitter… it all sounds like school playground stuff to me.

I’ll tell you what though: I wouldn’t fancy getting on the wrong side of Varoufakis. Don’t you think he looks like one of the baddies from a Die Hard film? He certainly cuts a figure amongst the euro politicos with his leather trenchcoat and untucked shirt.

Some would say he’s a fish out of water on this high-level political platform, but he’s nobody’s fool. I reckon he knows exactly what he’s doing. He should do – in 2004 he co-authored a book on unusual strategies that can be used during negotiations!

Game Theory and the prisoner’s dilemma

His book is called Game Theory: A Critical Text (it’s an update to his earlier Game Theory: A Critical Introduction) and you can read more about it on his website here.

And if you’ve not heard of it before, Game Theory is the mathematical study of decision-making. It’s used in conflict resolution and high-stakes negotiations as each party tries to gain the upper hand.

Here’s an example of the kind of thinking that goes on in Game Theory: this is the classic ‘Prisoner’s Dilemma’…

Two prisoners who committed a crime together are caught and questioned separately by police. The interrogations begin, but the way they respond to questioning will affect not only the outcome for them individually, but for their accomplice too.

  • If they cooperate and both remain silent, they each get a one-year prison sentence.
  • If one remains silent but the other confesses, the one who confesses is released without charge while the one who kept quiet gets a 20-year sentence.
  • If they both confess, they are each locked up for five years.

It’s not as straightforward a decision as you first think, is it? It all comes down to how well each of the prisoners knows the character of the other and how well he can anticipate their likely course of action.

So imagine Varoufakis wandering around, pondering this kind of logic problem for the last 30-odd years (he received his economics doctorate at the University of Essex in 1987 and has since held senior positions at the University of Sydney, and the University of Athens).

Then take into account the argument he put forward in his own economic thesis for what makes a good negotiator…

The hallmark of a top negotiator

Varoufakis says the best negotiator is one who lives up to a ‘schizophrenic ideal’: one who builds a reputation for punishing his opposition and for breaking the time preferences of his opposition. In other words, he’s volatile, unpredictable, and has a habit of intentionally rubbing people up the wrong way.

Sound like anyone we know?

So ask yourself: is there a chance reports of unusual behaviour last week could all be part of Varoufakis’ masterplan to ease himself into the best negotiating chair?

I think so.

Varoufakis is pleading innocence of course. He says: “Because I spent many years during my previous life as an academic researching Game Theory, some commentators rushed to presume that as Greece’s new finance minister I was busily devising bluffs, stratagems and outside options, struggling to improve upon a weak hand. Nothing could be further from the truth.”

But whatever you think of him, Varoufakis is certainly shaking Brussels up with his unorthodox ways. And I’m certain his moves – the way he dresses and the way he behaves – have all been carefully premeditated. But he’s not home and dry yet…

Yes, he’d secured a four-month bailout extension for Greece by last Friday, but an exit from the euro is still possible: they now need to agree on a list of bailout conditions (cue more brinksmanship!). A billion euros was reported to have flowed out of Greece late last week which adds a bit of pressure, so Greek news will still be a big driver of euro Forex markets this week.

And whatever happens, I’m sure Varoufakis will have a few more tricks up his sleeve yet, so let’s watch the master Game Theorist at work and see where he takes things next.

Meanwhile, over in the markets…

While the politicians were posturing and squaring up to each other last week, the markets were mostly trundling along in a sideways pattern. EURUSD traded a sideways while it waited for news, but even in markets like these there are always opportunities to be found.

Rangebound markets are generally not the most substantially profitable on a per-trade basis (I’m sure the scalpers will take me to task here!), but all I mean is the size of the move tends to come with an anticipated ‘cap’. While the range is still in place the maximum profit target you’d look for would logically go inside the previous high or low level of the range.

So let’s have a quick look at how you might have picked up a few pips last week. These trades all use very simple techniques I explain inside the Trader’s Nest Academy and I’ll give you a link to the relevant website pages below.


EURUSD 60 minute chart

So here’s how EURUSD looked last Tuesday night (17/02/15). It was only at this stage of the week the market gave clues it was respecting the top and bottom levels of a potential trading range: you saw how the market traded down onto a level of support late on Monday, which held (level projected forward from the previous week); and Tuesday’s price action was limited to the upside by resistance from Friday (and confirmed on Monday).

(If you need a quick refresher on finding good support and resistance levels click here to go to the relevant Trading Academy pages.)

So once you had the proven levels of support and resistance marked up (the blue horizontal lines), you could keep an eye on those areas for reversal patterns occurring. No guarantees, of course, but you now had some proven levels to watch and you knew the market was holding its breath over Greece: probabilities were good that the market would be contained to some degree.

Opportunity #1: Buy at support on Wednesday

EURUSD 60 minute chart

So here’s the picture on Wednesday night. You can see how the market respected support again during the day giving the opportunity for a buy trade. One way you could have entered the trade would be to look for a confirming candlestick pattern on a lower timeframe.

Here’s a nice 15-minute bullish engulfing pattern right on the support level. It could have had you positioned with a tight stop before the FOMC meeting minutes provided 70 pips of upside momentum a couple of hours later:


EURUSD 15 minute chart

Left to run to the top level of our range (or just below it), the trade would have chalked up 90 pips.

Opportunity #2: Sell at resistance on Thursday

The next opportunity came on Thursday, up at the top of the range:


EURUSD 60 minute chart

The market popped up through the level but was turned lower and left a nice ‘Tweezer Top’ reversal pattern in place on the 60 min chart. Left to run back down to support, this trade offered 50-odd pips with a slightly better than 1:1 reward-to-risk ratio if you’d positioned a stop loss above the tweezer highs.

There was more candlestick-reversal action late on Friday back at the top of the range, but that came right around the time reports of a provisional Greece/Eurozone handshake hit the newswires. Whether you’d be willing to wade-in at times like that would be down to your own appetite for risk.

Anyway, do keep an eye out for reversal patterns at the tops and bottoms of trading ranges, especially when you know the market is ‘on-hold’ for a particular reason – like it was last week.

And if you need a refresher on three strong candlestick reversal patterns to look out for – including tweezers and engulfing bars – you can click here.

Be Prepared: Market Moving Data Coming This Week (London Time).

Wednesday 25th February:
15:00    USD    Fed chair Yellen testifies
15:00    USD    New Home Sales
16:30    EUR    ECB president Draghi speaks

Thursday 26th February:
08:55    EUR    German Unemployment change
09:30    GBP    Gross domestic product
13:30    USD    Consumer Price Index
13:30    USD    Core durable goods

Friday 27th February:
13:30    USD    Gross domestic product
15:00    USD    Pending home sales

Monday 2nd March:
08:55    EUR    German manufacturing PMI
09:30    GBP    Manufacturing PMI
10:00    EUR    Consumer Price Index
15:00    USD    ISM Manufacturing

Tuesday 3rd March:
09:30    GBP    Construction PMI

Keep an eye out for more theatrics from Brussels this week, and I’ll catch up with you again very soon.

Happy trading!