I am adding to my short AUDJPY position

I’ve been short AUDJPY for a fair while now since 86.80.

This was based on deteriorating Chinese conditions, which affect demand for Aussie commodities such as iron and copper, and the evident risk off situation we faced through January and February, and arguably are still facing.

For this trade I’m just looking at taking some cash and covering the rest of my position that I have running – this is pretty high probability in my view, so I’m confident about changing my stop loss criteria and upping risk to 3%.

Let’s see how this plays out.

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Cryptos vs Small Cap Equities: the same, but different

I’ve asked myself two things recently.

1) Why the hell aren’t cryptos bullish again?

And

2) Why is the interest in cryptos when micro cap and small cap equities have been about for years?

Before I go further, I just want to put a disclaimer: I believe that cryptocurrencies and blockchain are going to be vitally important over the coming decades as we moved towards an even more digitised form of information and money transfer.

However, we have to overcome the primitive nature of the industry first – I believe that investors make their own luck through correct due diligence and own research, however, many of the crypto firms are just downright dodgy.

Notwithstanding Bitconnect, because that was just plain stupid and so easy to see that it was a Ponzi scheme, we’ve had a fair few ICOs popping up that have been fraudulent.

You tend to not have any fraudulent IPOs or equities listings where your money will be in effect, stolen. You might make a crap investment decision, but the company balance sheet, business plan, and overall health is available for all to see.

But this comes down to regulation – something that I am not sure that I or anyone wants.

The reason being is that, by doing your own research, you should come to a valid conclusion as to the business and investment risks. I don’t necessarily want a government department telling me what is good for me – if you’re stupid enough, for example, to join Bitconnect, then you deserve to lose your money (if you live in a country with adequate investment education).

For what reason would an investor choose to buy Dogecoin as an example? Are there any fundamentals behind it? Well, no, apart from ‘moon!’. On which planet is that a valid investment case? If you make money then fantastic, but someone else is always losing in this case, since there is no value being added.

And it’s the same for many others.

People seemingly go headfirst into a nice sounding white paper, where, if one were to approach a seed investor for regular backing, you’d get maybe 0.1% the total capital at that stage due to there being no actual product and the angel/VC not wanting the undue risks.

The AIM market for example can act like a mini crypto market, just with possibly lesser gains on average – but that’s simply due to the fact that the market isn’t on major steroids.

You can put forward the idea that there have been many crypto millionaires made, but they are in a small minority compared to the rest (and the amount of losers probably outnumber the winners, the losers just don’t tell you about it) – there are similarly many AIM investors who have made a lot of money through simply buying and holding a select few good companies, or even day trading (except with no leverage).

I just find it odd that a huge bull market in AIM and small/microcaps to the same extent as crypto hadn’t really occurred, but you could say that it’s really due to the differences in the assets… but I mean, buying ultra low on any asset and making 70-100% pretty quickly (as occurs on AIM relatively frequently) is nothing to be unhappy about… unless you compare it to crypto.

This I’d argue, comes down to the demographics of those involved in the two markets.

I reckon we’re going to see larger gains over the next year or two in cryptos. When Fintechs start pushing for them to become more mainstream and the payments use cases are made even more viable, this is when regulators will get involved though.

But the good aspect is the nature of the beast… it’s pretty hard to regulate post ICO stage, the same as fiat currency markets, which are OTC and largely unregulated, and for good reason too.

I am totally here for what the developments in blockchain and crypto tech can bring, but providing credibility through weeding out the fraudulent ICOs will benefit this 10-fold in my view, and this will be a huge contention over the next 2-5 years (and probably a lot of money involved if a private solution could be found for weeding out the crap with total impartiality – thinking caps on).

How to stop procrastinating with one phrase.

Yesterday I shared what I’ve learnt over the last 7 years of trading.

There’s honestly so much more, but I’m not here to do a biography, partly because Jaegermeister would have caused periods of severe amnesia – it would be rather disjointed.

There was one element that I spoke about yesterday that I’ve been trying to employ for a few years now, with some success, but abject failure in other areas, purely because of willpower & poor time management, but I think I will get there in the end.

‘Practice choosing discomfort.’

I think I mentioned ‘front loading pain’ yesterday in the piece I wrote.

That’s it.

The brain works by finding the most ‘comfortable’ route to completing tasks.

There’s been so many times where I’ve done 2/3 of the easier tasks on a to-do list, felt accomplished, then thought that because I had completed those then the bigger task needn’t be done…

Then the next day comes…

And you repeat…

Until your deadline hits and you’re in a worried and rushed mess.

Do the hard tasks first.

In trading for example, many don’t write down their thoughts on the market at the starts of the week, the key levels etc. It’s almost like pre-planning is ancillary and they can’t be bothered.

Arguably that’s the most important part because when the time comes to deal, you’re prepared and do not second guess yourself.

The feeling you get when you frontload pain is the anticipation of going into a cold shower; so the best way to get used to the feeling is to have a cold shower for a month in the mornings.

Then apply the same feelings from that to everyday tasks.

It really does work.

7 years of trading: what have I learnt?

Today I learnt two things.

Mixing sweet potato and normal potato is one of the greatest things ever.

And secondly, Heikin Ashi candles are almost a cheat code for how I trade one of my strategies.

I’d never thought to really change my chart configuration from standard candlesticks before.

The furthest I’ve ventured is to use a line chart for simple, unbiased highs and lows.

But Heikin Ashi has given me a totally different perspective that I’m obviously going to have to test with over the next few weeks, but instantly makes sense as to why it would work with my strategy.

But this is just one example of what I have learnt after 7 years (the first two were just pissing about in all reality though, thinking I’d cracked it but being a million miles away multiple times).

You genuinely learn something new everyday when trading…

You know that saying ‘in the long run we’re all dead’?

I want to change it to ‘in the long run we’re all dead comfortable’.

Looking back, I’ve noticed that any short term discomfort has been lessened each time, the longer that I have traded.

I’ve learnt to embrace the discomfort of a loss or taking a position because I understand that the short run is entirely irrelevant to conducive trading.

What’s more important is that this has probably translated into life.

Planning for a few months and years at a time has become enjoyable, and even though there might be hiccups along the way, it smooths out when you have one eye on 6 months, 1 year, 3 years etc.

You learn to adapt; I don’t think I would have developed this resilience without facing millions of other people daily looking to tear me a new one with the click of a few buttons and a horizontal line drawn across their screens.

More practically, trading makes you aware of risk – it’s everywhere and in everything you do. I always think back to my favourite paper ‘Prospect Theory‘ when making a decision based on the future and remember that I’m most probably going to be irrational and so I keep that in mind.

The reason I never sports bet is because the odds aren’t in my favour, firstly because the bookies are just as crooked as market making retail firms, but secondly because I don’t have an edge.

By participating in sports betting, in the long run I won’t make anything. So what’s the point? Sometimes not trying something if you know you’re crap can save you time and energy – especially if you focus on the things you are good at instead.

Having studied economics at university, I can tell you one thing.

90% of it is absolute rubbish and doesn’t apply whatsoever to the real world, how markets move or how people actually act, whether rationally or irrationally.

Econometrics was useful – but having to look at market dynamics everyday and update my fundamental view every few weeks is what taught me real economics.

For example, you note that some fundamental activities bear more weight sometimes than others – then others this will be flipped. See the US Dollar currently weakening even with the base rate increasing.

My economics professors would have told me that the dollar should rally…

I don’t think I’ll be doing this forever, but I am so glad I did because trading is one of the hardest things you can do and it’ll teach you so much about yourself – more than the majority of other ‘jobs’ (or degenerate capitalist addictions – however you want to frame it).

I’d actually recommend everyone to try it just to see how hard it is, and if you want to, I’m more than willing to help you begin, but prepare to be humbled time and time again.

‘Volume in FX is redundant because it’s decentralised.’ Bollocks.

I hear this time and time again.

‘Why would you be analysing volume? It doesn’t matter in FX.’

This is just completely wrong for most cases.

First let’s get some things out of the way – trades volume and tick volume (which we will look at) are two slightly different things.

Traded volume shows actual order size in any given price spread period.

Tick volume shows the amount of different price movements in a given price spread – or how many times price moves up or down.

It’s been noted many times that FX futures traders have been at a disadvantage to spot traders – one is exchange based and you face centralised volumes and the other as explained above isn’t, its over the counter.

When looking over an hourly time-period, with data comparisons of traded volume in futures markets and tick volume from EBS inputted, you can input variables into a Pearson product moment equation to solve R and find a correlation between datasets.

It was found that (on an hourly basis), USDJPY’s tick volume vs traded correlation volume is 0.918, EURUSD 0.936, GBPUSD 0.979 and EURCHF 0.94.

These correlations are pretty high when you consider that for years, people have said that you can’t derive valid conclusions as to volume on the OTC market!

You do have to assume a few things though – you’re not trading via a market maker, and that the correlation can change.

But in the end, I see absolutely no reason as to why you can’t use volume when trading FX, and actually, I think it’s under-utilised.

The elephant in the room that no politician talks about

It puzzles me as to the various conversations surrounding house prices.

Last night on Question Time, structural engineer Roma Agrawal (and the others, so it doesn’t sound like I’m picking on her) mentioned that a solution to the nation’s housing issues is to build more houses.

Build more houses? All I see are houses being built.

The issue purely lies in property speculation and is not an issue of building activity. In fact, we have an oversupply of housing in the UK. In 2014, there were 28 million dwellings in the UK and only 27.7 million households. London’s dwellings increased more than the number of households between 2001 and 2015.

Of course it’s multifactorial, with social housing stock being low and there being a culture of property (land) being the ultimate investment for Brits, but no politician has mentioned the longer term trend.

The Lady of Threadneedle Street.

I’ve banged on about this on Twitter a million times but I want to have something here that expresses my views about this explicitly and more comprehensively than however many characters Twitter allows you to.

Here is the UK house price index.

United Kingdom House Price Index

And here is the UK 10 year bond yield over the same period (read as a proxy for interest rates).

Historical Data Chart

Can we not see a correlation here? Is it just me that’s going crazy or do I not understand something?

It is absolutely insane – when you have low rates, where are you going to put your money? Into investments that are likely to yield more than the base rate. If it’s assumed that the base rate is going to decrease year on year then why would you be partial to simply saving? Why wouldn’t you enter the property market?

Here’s a chart of UK savings from 1952.

United Kingdom Household Saving Ratio

If you draw a line of best fit from 1980 to now, it shows progressively lower highs and lower lows. A trader would call that a downtrend. It makes sense since interest rates have been falling progressively since then. And where has that savings potential gone? Into property at progressively higher prices.

Back to the headline: why do politicians not want to acknowledge this?

Well firstly, it’s a global phenomenon. The same thing has happened across the world where property is seen as a speculative investment rather than an object of utility. If we look at most of Europe, they have an entirely different culture of investment – and especially do not consider housing as being a speculative asset as much as we do.

Here is a chart of Germany’s personal savings ratio.

Germany Personal Savings Ratio

What we can deduce here is that even since they’ve has the Euro and the real base rate has been negative, they still have a savings rate almost double of ours (UK chart is household savings ratio, the German is personal but should average out to be the same).

German homeownership was 51% this year – ours was 63%.

But this is due to Germans actually increasing in homeownership – their rate was 41% in 2004 – the increase most probably caused through ultra low rates and ECB’s penchant for asset purchases post crisis; ours has gone the other way – in 2003, our homeownership rate was almost 71%.

A final chart shows wage growth in the UK.

United Kingdom Average Weekly Earnings Growth

Compare again with house price increases – those who own hard assets end up seeing property price appreciation, charge higher rents which means the capability for firms to pay people decreases. It’s all about slimmer margins. What’s more, those who have a skinny and seemingly stagnant pay packet can’t buy since their outlay is on rent, and property prices keep going up.

Politicians don’t want to speak about this because it would also call into question the independence of the Bank of England.

The Bank’s QE programme is government debt cancelling – private interests love QE. The government loves QE; it cancels their debt after all. When the bank buys a government bond, it effectively pays interest to the Treasury until maturity. Which government doesn’t like that while being able to service the big banks and hand out tax breaks to their mates?

That’s for another day.

The final bit is that they actually probably don’t want to slump into irrelevancy and make it seem like it’s none of their faults – how will they include a huge manifesto push if there is no issue with regards to housing? What an awful situation that would be if everything were fine.

The solution to house price rises is to prevent this speculation; tax the value of land. This would create a society that looks to invest productively rather than sitting on land and seeing it grow just because everyone else and their nan are buying.

At the end of the day though, this is a central bank problem. It has happened again and again. In the 90s, loose Keynesian policy where interest rates didn’t match the credit requirements of the economy, led to margin being taken out to buy these super amazing dot com stocks that ended up being absolute turds. Loose interest rate policy gives rise to that great term irrational exuberance.

Debt based expansions lead to huge mis-allocations of resources in the economy, and Mr Can’t Do, Governor at the Bank of England, has come from Canada and caused the same issues here as he did there.

I still laugh when no politician mentioned the base rate cut in August 2016 but blame the fall in GBP entirely on Brexit as if exchange rate dynamics suddenly flew out of the window.

As Michael Caine said ‘you’re only meant to blow the bloody doors off,’ but the BoE has caused another bubble where the doors, windows, Laura Ashley furniture, dog, cat and roof are going to be blown off or away when we finally unravel this mess.houses