FXStreet Expert Contributor
FXStreet
The other day Andrew Ross Sorkin interviewed Ray Dalio who runs Bridgewater Associates, the worlds largest and most profitable hedge fund. The interview took place in Davos against the crisp background of the Swiss Alps and Mr. Dalio had a full half hour to expound of the art of investing. Here are three of his main points that I think every forex trader should know.
1. Market prices are determined by how do events transpire relative to what’s discounted. This is such a critical point. It explains why AMZN can trade for 100 times earnings and AAPL for 10 even though AAPL has made more money this quarter than AMZN made it its whole corporate existence. In FX it explains why prices rise on bad news and fall on good news. The key question to always ask isn’t what the number will be, but what is really expected. Furthermore, the greater the price rise ahead of the move the greater the beat must be in order for prices to ramp even higher. Its always this dynamic interaction between price and expectation that creates direction in the market. That’s why markets are not a reflection of reality and that’s why they can frustrate so many traders.
2. Understand Risk Parity. What’s more dangerous? Own a stock portfolio for cash or borrow up to 100% against a bond portfolio. Surprisingly enough the second option is actually less volatile. In investing one thing is not like the other. Assets have very different profiles and allocating 50% to one and 50% to another could mean that you are still assuming as much 80% of the overall risk. In FX this means that you can not size all your trades the same way. 100,000 units of GBPJPY is not the same risk as 100,000 units of AUD/USD. Know the average true range of the currency pair you wish to trade and normalize position size to your individual risk tolerance.
3. Know when to walk away. Mr. Dalio agrees with me the markets are a zero-sum game. ( See last week’s column). He uses a poker analogy to basically say that if you sit down at the table and you don’t know who the sucker is -- then the sucker is you. Risk avoidance therefore is the paramount goal of any successful speculator. For the retail forex trader the two biggest sucker moves are to trade on ultra-short term time frames in combination with extreme leverage. Eliminating those two behaviors will not guarantee success but it will certainly reduce your chance of failure.
What’s amazing about the Dalio interview is just how common sensical his advice is. For forex traders the world over his words should be received wisdom as we battle the markets every day.
1. Market prices are determined by how do events transpire relative to what’s discounted. This is such a critical point. It explains why AMZN can trade for 100 times earnings and AAPL for 10 even though AAPL has made more money this quarter than AMZN made it its whole corporate existence. In FX it explains why prices rise on bad news and fall on good news. The key question to always ask isn’t what the number will be, but what is really expected. Furthermore, the greater the price rise ahead of the move the greater the beat must be in order for prices to ramp even higher. Its always this dynamic interaction between price and expectation that creates direction in the market. That’s why markets are not a reflection of reality and that’s why they can frustrate so many traders.
2. Understand Risk Parity. What’s more dangerous? Own a stock portfolio for cash or borrow up to 100% against a bond portfolio. Surprisingly enough the second option is actually less volatile. In investing one thing is not like the other. Assets have very different profiles and allocating 50% to one and 50% to another could mean that you are still assuming as much 80% of the overall risk. In FX this means that you can not size all your trades the same way. 100,000 units of GBPJPY is not the same risk as 100,000 units of AUD/USD. Know the average true range of the currency pair you wish to trade and normalize position size to your individual risk tolerance.
3. Know when to walk away. Mr. Dalio agrees with me the markets are a zero-sum game. ( See last week’s column). He uses a poker analogy to basically say that if you sit down at the table and you don’t know who the sucker is -- then the sucker is you. Risk avoidance therefore is the paramount goal of any successful speculator. For the retail forex trader the two biggest sucker moves are to trade on ultra-short term time frames in combination with extreme leverage. Eliminating those two behaviors will not guarantee success but it will certainly reduce your chance of failure.
What’s amazing about the Dalio interview is just how common sensical his advice is. For forex traders the world over his words should be received wisdom as we battle the markets every day.
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Editors’ Picks
EUR/USD flirts with daily highs, retargets 1.1900
EUR/USD regains upside traction, returning to the 1.1880 zone and refocusing its attention to the key 1.1900 barrier. The pair’s slight gains comes against the backdrop of a humble decline in the US Dollar as investors continue to assess the latest US CPI readings and the potential Fed’s rate path.
GBP/USD remains well bid around 1.3650
GBP/USD maintains its upside momentum in place, hovering around daily highs near 1.3650 and setting aside part of the recent three-day drop. Cable’s improved sentiment comes on the back of the Greenback’s irresolute price action, while recent hawkish comments from the BoE’s Pill also collaborate with the uptick.
USD/JPY edges up above 153.50 with all eyes on US CPI figures
USD/JPY appreciates above 153.00 but remains on track for a 2.4% weekly loss. Trading volumes remain subdued on Friday, ahead of the IS CPI release. The Yen remains supported by hopes of a stable government and calls for further BoJ tightening.
Editors’ Picks
EUR/USD: Yes, the US economy is resilient – No, that won’t save the US Dollar Premium
Some impressive US data should have resulted in a much stronger USD. Well, it didn’t happen. The EUR/USD pair closed a third consecutive week little changed, a handful of pips above the 1.1800 mark.
Gold: Metals remain vulnerable to broad market mood Premium
Gold (XAU/USD) started the week on a bullish note and climbed above $5,000 before declining sharply and erasing its weekly gains on Thursday, only to recover heading into the weekend.
GBP/USD: Pound Sterling remains below 1.3700 ahead of UK inflation test Premium
The Pound Sterling (GBP) failed to resist at higher levels against the US Dollar (USD), but buyers held their ground amid a US data-busy blockbuster week.
Bitcoin: BTC bears aren’t done yet
Bitcoin (BTC) price slips below $67,000 at the time of writing on Friday, remaining under pressure and extending losses of nearly 5% so far this week.
US Dollar: Big in Japan Premium
The US Dollar (USD) resumed its yearly downtrend this week, slipping back to two-week troughs just to bounce back a tad in the second half of the week.
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