Plus: How You Can Make Money When They Run The Stops

It was the School Summer Fair last Saturday…

By the time we got home and finally put the kids to bed we were both exhausted.

Alice flopped down on the sofa to watch Casualty, and I sneaked off to my study. I just needed half an hour to wind down after relentless afternoon-long demands.

If you’ve got young children, I’m sure you know what I mean!

Anyway, I set about catching up on some correspondence but ended up finding this instead…

It’s an old British documentary following three currency traders from around the globe as they go about their day’s business.

“This will be interesting,” I thought, as the old-school orange and yellow BBC2 logo faded-in.

The narrator explained how we’ll follow a game of ‘electronic poker’ and introduced our three traders.

There’s Richard in London, Ronnie in New York and William Wong in Hong Kong.

Richard and William are both trading for banks and Ronnie runs a little hedge fund in New York. These were the days before the currencies were really open to lone-wolf traders like us.

This is an eye-opening insight into the way big institutions trade

The date of filming – 1985 – is irrelevant if you overlook the obviously out of date bits.

You’ll just need to ignore things like the figures they quote when talking salaries, and the mention of defunct currencies like the Deutschemark and the Lira.

We kick things off with a visit to Wong in Hong Kong.

He’s been busy buying Sterling in the morning Asia session and wants to take profits. Problem is his large position size.

He needs to offload his Sterling before the market figures out there’s a big seller at large – causing the price to drop prematurely.

And his sneaky ploy is to call on his colleagues – who usually trade other currencies – to place multiple sell orders on his behalf.

He splits his position down, and with a wiggle of his fingers, gives the green light for his mates to shift them for him.

Job done. Twenty grand sails into Wong’s pot!

Next, we pan around the globe to Richard’s house in Kent.

It’s early morning and he’s on the phone to his banks’ Hong Kong office – warning them he’s going to knock Sterling down 50 or 60 points when he gets into work!

He jumps in his red BMW, sparks up a Rothmans, and roars up the M20 towards The City. Richard trades for Barclays…

“He’s up there with the gamblers – the bank loves him for it”

Hmm, I wonder if they’d go on record with the same words these days!

Later in the session, Richard suspects a Russian Bank – nicknamed ‘Boris’ – is building a position. Barclays gatecrash the Russian’s party and start buying for their own book.

He has all the guys on the trading desk getting him quotes on the phones – this was before computerised trading. By the time they’d done the deal, Barclays had trousered seventy-five grand. From start to finish it took about three minutes!

Interesting comments from Richard’s boss: “He started out getting the sandwiches in his early 20’s, got kicked about by the other dealers, and has no ego whatsoever. If he’s wrong, he knows he’s wrong, and will cut-out”.

We see a bit of this from Richard in the afternoon. The Money Supply figure is due out and he’s already long twenty million in anticipation. The number comes out bad for him though…

He looks like he’s swallowed a wasp, does a bit of desk thumping, but true to form – knows he’s got it wrong and starts giving the orders to bail out.

And he never even spills the ash off the end of his cigarette!

Over to Ronnie in New York next…

Ron’s a complete speculator trading for his own book and thirteen wealthy clients. When talking about his trading approach, he says something we can all take note of:

“We used to be more aggressive but the market changed completely. At the moment, the way we trade is we wait, and we wait, and we wait. When we see an opportunity we jump in very quickly – but it has to be right. If it’s not right we cut it very quickly and we wait again.”

We watch Ronnie’s Mercedes screech out of the car park of his Manhattan office as the narrator winds things up:

“Between them, they made over one hundred thousand pounds on this day… from what has become a very wild business”.

And this was in 1985…

I’m not sure what today’s equivalent figure would be, but I’ll tell you what – I wouldn’t mind just 1% of it!

So it’s a nice little documentary – well worth a watch. It’s got the essence of our business boiled down into 30 minutes of ups and downs.

But I think the big take-away is this:

No matter who you are, and no matter what resources you have behind you, at the end of the day we traders stand shoulder to shoulder, and live off our wits.

Watch this film, you’ll see each of the three traders take losses on the day, and remember – these were the guys at the very, very top of their game. So no one knows for sure what’s going to happen next – you don’t need to.

All you need is a burning desire, and the dedication to make it happen. Because the door is wide open for you to milk the currency markets in just the same way as Richard, Ronnie and William did.

And the playing field today has never been more level.

Have a look at ‘Billion Dollar Day’ on YouTube here. I think you’ll enjoy watching it.

Quick Charting Trick: How You Can Make Money When They Run The Stops

It’s a common complaint – a trader places his stop-loss in a logical place according to recent price action, only to see his stop triggered. The market then pivots round and heads off back in the ‘right’ direction leaving our trader open-mouthed in amazement.

Yep, it’s the dreaded ‘Stop-Running’… but how can you put the shoe on the other foot and actually make money from it yourself?

Here’s a nice example from Friday 21st June 2013 on EUR/USD with some ideas on what to look out for in future:

EUR/USD 5 Minute Chart

A: The market has broken through support and made a strong move to the downside.

B: Here’s the anticipated pull-back. No real buying strength – a bit of profit taking before the next wave of selling comes in.

C: This is the ‘Swing High’ that a lot of traders will use to position stop loss orders protecting their short positions. Once the market had pushed down on the red bar immediately after C, stop losses would be entered or adjusted to a few pips above the C high.

D: Here it is. The market goes after the liquidity sat waiting in those accumulated stop loss orders above C. They get it up there and trigger the orders. The lack of real bullish intent is obvious though – the market turns and puts in a new bearish (red) bar.

E: Here’s your opportunity. You’ve been observing all this action going on and you’ve just had your confirmation to trade once we saw the close of that bearish bar – note how not even a single bar closed above the swing high at C.

There’s a high probability of a continuation to the downside now. If you did get short on the close of the bar marked E, you could use the previous low at the end of that down-leg marked A as a technical target – maybe liquidate part of your position just a couple of pips above that low (around 1.3145)?

Or you could simply trail your stop down behind you and let the market take you out.

Let’s see what happened:

EUR/USD 5 Minute Chart

F: There goes that technical target at 1.3145

G: Stopped-out if you simply trailed your stop above the pullbacks.

Not bad for last thing on a Friday!

Keep an eye out for these kinds of moves being engineered – and use them to your advantage.

Be on your toes… Market moving data coming this week:(London Time – BST)

After the Fed’s QE3 plans gave the USD a shot in the arm last week, let’s see what the week ahead has in store.

Tuesday 25th June:

13:30    US     Durable Goods (USD)
15:00    US    New Home Sales (USD)

Wednesday 26th June:

13:30    US    GDP (USD)

Thursday 27th June:

09:30    UK     GDP (GBP)
13:30    US     Initial Jobless Claims (USD)T

I’d love to know what you think about the Stop-Running idea.

Email me at the usual address.

Until next time…

Happy Trading!