Closed EURUSD +90 Pips. A Look At Manaing Risk Like One Of The "Greats"

I cut our EURUSD short position this morning on Twitter at 1.2820 for gain of 90 pips because frankly, I have very little understanding of what's going on this market. In that situation, it is usually not a good idea to look a gift horse in the mouth.

Investor sentiment is really quite poor as judged by the extremely weak US 10 yr yield fresh off a test of the 2.88% early July lows. The bounce from those lows to the current trading level of 2.934% has been quite anemic indicative of corrective price action. A 3rd test of this level in coming sessions looks possible. Moreover, the equity rally born in the back half of yesterday's New York session looks to have run of gas at key Fib resistance levels of 1085 in the S&P 500, 10,260 in the DJIA, and even the recent outperformer NAZ 100 is failing at 1847.

For over two years, the dollar has traded inversely to the S&P 500, which makes for a direct correlation of EURUSD and the S&P. A major source of my hesitation in this summer market is a second test of this inverse relation between USD and the S&P. The first test came in Feb, March, and April of 2010 when the S&P and EURUSD diverged from the recent correlation. This divergence was quickly unwound when the S&P got slaughtered from the 1213 high catching up to the falling EURUSD. The two traded in unison down to the June 2010 lows of S&P 1047 and EURUSD 1.1877 when an interesting price development occurred. The S&P made a lower-low on July 2nd, where as EURUSD made a higher-low days before on June 29th. This 2nd divergence is still in progress as EURUSD has been pushing higher while the S&P has continues to probe lower. Other currencies like AUD and CAD are also acting strong indicating that this weak equity performance is not warranted. But circling back to the first market I mentioned, US bond yields, suggest that this fear and equity weakness is justified.

I attribute this confusing intermarket picture to just plain under-participated summer trading. Volumes are notoriously low, which allow markets to diverge from their normal course. It's a case of when the cat is away, the mice will play. Once the cat (read volume) returns, the mice will quickly get back in line.

While the market meanders around I want to take a quick look back at the SOTD track record, since I began tracking it in November 2009. In total, I have written about 129 trades in SOTD, 70 of which were wins, 49 were losers, and 10 were breakeven. This makes for a 54% win rate. When you think of an “expert” in a given field, do you think being right only slightly more times than being wrong qualifies somebody as an expert? If you said “no” in a sense I would agree with you. But what I think does qualify the track record is the average size of the winners and losers. The average size of the winner is exactly double that of the average loser. Also, my largest losing month is a little more than half the size of my smallest winning month. Further, I can say that over the past 129 trades I did not have a single losing trade that “got away from me”. How many of you reading this had that one large loser that undid the great progress you made on the prior 4 or 5 trades? How many of you moved, or better yet never placed, a stop loss allowing for a losing trade much larger than you originally intended? If you said YES to any of these, you are still lacking the knowledge and confidence in your methodology to stick to your intended stop loss levels. The winners will always take care of themselves. It is the risk management part of this service that will help you succeed as a trader. But it's no fun concentrating on your losers, is it? Again, if you want to succeed as a trader it is the endless pursuit of minimizing the average size of the inevitable stop losses that will make the difference in your bottom line in the end. That question of whether a 54% win rate qualifies someone as an expert was actually a bit of a trick question. The greatest living US hedge fund manager, Paul Tudor Jones, is on record saying that some of the best traders in the world will not be right more than 50% on all trades made in their careers. The difference is all in the average winning size versus average losing size. At the bottom of this report I have updated several seminar dates and locations around the globe to come out and learn our 3 dimensional approach to trading. I encourage you to come out and learn. It is the best way to shorten the learning curve of this business.