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 stays near 1.0800 after upbeat US data
EUR/USD stays under modest bearish pressure and trades near 1.0800 in the American session on Thursday. The data from the US showed that the real GDP growth for the fourth quarter got revised higher to 3.4% from 3.2%, supporting the USD and weighing on the pair.
GBP/USD stays in daily range above 1.2600
GBP/USD fluctuates in a narrow channel above 1.2600 on Thursday. The better-than-expected Initial Jobless Claims data from the US and the upward revision to the Q4 GDP growth helps the USD stay resilient against its rivals and limits the pair's upside.
Gold pulls away from daily highs, holds above $2,200
Gold retreats from daily highs but holds comfortably above $2,200 in the American session on Thursday. The benchmark 10-year US Treasury bond yield stays above 4.2% after upbeat US data and makes it difficult for XAU/USD to preserve its bullish momentum.
XRP price falls to $0.60 support as Ripple ruling doesn’t help Coinbase lawsuit against SEC
XRP programmatic sales ruling by Judge Torres was completely rejected by another US Court that ruled in favor of the SEC in a lawsuit against Coinbase.
Portfolio rebalancing and reflation trades emerge into Q2
Yesterday’s price action pointed at a possible end-of-quarter portfolio rebalancing as the session saw the laggards of the quarter like Apple and Tesla gain, and the stars like Microsoft and Nvidia retreat.
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