Lessons from the Australian dollar
Last month, I shot out a Trade Alert to buy the Currency Shares Australian Dollar Trust (FXA) December, 2013 $89-$91 bull call spread that turned immediately profitable. A mere four trading days later I sold out, after the (FXA) rallied an impressive $1.2, adding 0.84% to the value of my model trading portfolio.
That turned out to be the absolute top of the move. This is not unusual, as I am legendary throughout the market for picking the perfect tops and bottoms of market moves, and then leveraging up the other way. This is why pros stampeded into my Trade Alerts. Maybe it?s my math and engineering background that enables me to do this with such precision, a world where accuracy is measured to the Angstrom (0.0000000001 meters).
When the market marked my position at its maximum theoretical value of $2.00, that?s all I needed to know. The Trade Alert to get out flew your way the next morning.
After that, the Aussie was deluged with bad news. Reserve Bank of Australia governor, Glenn Stevens, said he was considering intervening in the foreign exchange market to head off its appreciation. Then, the government blocked a $2.7 billion takeover bid by US agribusiness giant Archer Daniels Midland (ADM) for the Australian grain handler, GrainCorp. A ban of foreign takeovers means less capital coming into the Land Down Under. Then, Goldman Sachs followed up with a forecast that the Aussie was heading for $85. After that, it was all over but the crying.
So here we are three weeks later, and I am getting plaintive emails from followers asking me what to do about their Australian dollar positions. The excuses as to why they are still long Aussie are legion, and range from ?I was traveling? to ?my dog ate my homework.? In the meantime, the (FXA) has plunged from $93.80 to $90, spilling much blood among those who still held the position.
Let me tell you how many trading rules these people violated:
1) When positions go deep in the money, you always place a stop loss at your cost, below the market. That way, you are effectively playing with the ?house?s money.? Your worst case scenario is that you break even.
2) You can?t travel and trade. I structure these trades so they can breathe and you don?t have to watch your screen 24/7. But you can?t disappear off the face of the map counting on notes in bottles washing ashore to keep you up to date.
3) Understand your own risk tolerance. Before you enter every trade, calculate how much money you are willing to lose if it goes against you. Then, if it hits that point, get out in the most automatic, emotionless, automaton way possible and go on to the next trade. There are plenty of fish in the sea, over 100 this year alone. You don?t need my permission to take a loss.
4) Don?t look at any position in isolation, look at the entire portfolio. I design these things so that some will be going up in value at any given point in time, and others down, in all market conditions. That way, one will hedge the other, limiting losses. In the case of the (FXA), your hedge was in being short the Treasury bond market (TLT), (TBT), which was profitable, and mitigated your losses if you didn?t get out of the (FXA).
5) You?ve got to watch the news. Bloomberg, Reuters, and the Wall Street Journal can get you a headline faster than I can send out a Trade Alert. When the Australian central bank governor started flapping his gums about possible intervention to push his currency lower, that?s all you needed to know. Hasta la vista, baby.
6) I am not always right. In fact, this year?s trading statistics show that I am wrong 15% of the time. That is less than almost anyone else. But wrong is wrong. Don?t let that 15% cost you all your profits for fear because you lack discipline.
I don?t think the Australian dollar is going down forever. In fact, there is still a reasonable chance that the Currency Shares Australian Dollar Trust (FXA) December, 2013 $89-$91 bull call spread will close at its maximum theoretical value of $2.00 by the December 20 expiration.
Central bank intervention can only dictate the direction of a currency for only short periods. After that, fundamentals take over. In the face of a 2014 global synchronized economic recovery, that means UP for the Aussie.
International interest rate differentials are the primary factoring in determining direction over the long term. With overnight Aussie rates at an all time low of 2.5%, further cuts are unlikely, lest the real estate bubble there inflates further. That means the next directional change in Australian interest rates is up, and that will be great news for the Aussie.
