My good friend trader Paul Wallace pointed out an interesting Bloomberg article this morning, whose title referred to currency traders experiencing a long losing streak. It made me think about some of the going-on’s in the financial markets.
Here’s a link to the Bloomberg article.
The points that I found insightful were as follows:
Professional money managers managing large amounts of money (i.e. sometimes billions of dollars) also seem to use simple trend-following strategies – i.e. they try to find momentum and then hop onto it.
Since they are using large sums they need to use higher timeframes (daily, weekly, monthly) else they cannot leverage their trading capital (i.e. the capital of their investors, retirees, pension funds, insurance companies). Their strategies (where to enter, how to manage the trade, and where to exit) are probably not massively different than my K5 trading strategy, except that I use the 1-hour timeframe to execute.
With K5 I am finding that I am losing money when the market is going sideways – i.e. when price is consolidating. I assume the same would apply to big money managers when they are trying to trade with momentum on higher timeframes and then the market goes sideways – a good example is the daily EURUSD chart (see below) which is the most liquid forex instrument (by a mile!) and should therefore be a natural choice of instrument for big money managers.
Additionally sometimes the strategy seems to be as simple as central bank policy divergence (sell EURUSD if Fed is raising rates and ECB is lowering rates) – to put in the words of one of my colleagues “just pick your level and go short” – i.e. sell every time that the price pops up a little bit. This does surprise me a little bit – this is not the realm of smart brains – it’s pretty straight-forward.
On the other hand, I imagine that mean-reversion traders have been making a killing the last few months.
Does this imply that possessing the skill to forecast/predict volatility levels is a sure road to riches?
Anyways, just writing down some of my thoughts/insights.