Wednesday, February 27, 2008

Quick! Adapt or Perish!--IFCN Wk 12 -Wed- Equity: $563.78

The Alpha account had a very good day.

It is currently at $563.78-- up more than $75 from last Friday.  We are still long Eur/Usd and Gbp/Usd, and short Usd/Chf with substantial open profits.

This week's volatility, in the currencies and other important markets highlights the question of why do traders do what they do?

Almost all people trying to trade apparently do it to make gains or money on their capital. How traders accomplish that task is where they all differ.

Most know that traders make profits utilizing many different techniques. Timeframe and risk tolerance filters out which basic style a trader will primarily inhabit.

There are two primary successful groups who trade; the totally mechanical traders (or at least those who wish to be as mechanical as possible) and those who trade low risk setups and have a more "fluid" approach to trading the markets. Both only succeed if they have an definable edge.

The benefit of the first group's style is that entries and exits are well-planned and usually very executable by design. The benefit of the latter group's style is they can find numerous opportunities that are situational in nature and can take advantage of them with little prep time. A significant number of the second group occasionally get stunning trades, which seems to validate their style for those who favor it. Often the people who trade this way have a personal nature that makes it difficult for them to follow a strict approach.

I have observed that members of the mechanical group tend to regard the "fluid" types either as anomalies or unexplainable exceptions and consider them an annoyance similar to a webpage pop-up.

I find both styles have tremendous merit.

What most newer traders don't realize is--- the longer one trades, whichever of the groups you start in--- as you get more successful you will gravitate towards the other group and adopt more of the other's style.

I had a very busy day today, answering the phone every few minutes between trades. Watching 20 markets for potential orders and following up on fills that get held up is enough by itself most days.

I talked to 9 different traders (most of them commodity fund managers) about the "crazy" volatility we are experiencing.

Lenin once said that Wheat was the ultimate currency. What we've seen the last few weeks in Minneapolis and Chicago lends credence to his words.

Today, Chicago Wheat went from up 60 cents to limit down-- down $1.35 from the previous close ($6,750 contract) to limit up-- $2.70 higher ($13,500/contract) within an hour. Wheat actually jumped the last $2.10 ($10,500/contract) of the move in less than 3 minutes.

Minneapolis Wheat for March dropped $5.40/bushel right after the open. From the high put in Monday at $25.00/bushel the market's low today at $17.00 meant that it had a 32% drop in 2 days. That is $40,000 per contract loss in 44 hours. I know a guy who had 30 contracts through the last 2 days. He isn't happy.

In every case, the primarily-mechanical-trading professionals I talked to had to trade differently than their models typically require.

To make the necessary deviations each of them had to go back to their personal belief system drawing-boards and determine what it was they were ultimately trying to accomplish when they started--- and if that concept still applies. If it does, are they accomplishing their mission the best way possible by following their current method? Maybe all they need is a contingency plan for high volatility. Or maybe their system was never really "right".

When faced with simultaneous, completely unbelieveable action in wheat, some of the metals, petroleum products and currencies-- many systems were not up to the challenge.  Systems break down when liquidity fails.  

Systems, whether mechanical or subjective, are products of the markets themselves. When the markets turn into something that is unrecognizable by the human who is attempting to extract gain, the core beliefs of the trader are tested in a way that no simulator could ever conceive.

Truth is stranger than fiction. This mandate applies to markets also.

What are your core beliefs? Can they, and your current systems handle crazed markets?  Currency markets can also get extreme.  Do you have a contingency plan for that time?
Stay sane. I'll attempt to do the same.

Joel Rensink

PS: To receive the FREE! trading rules for the Infiniteyield Forex Challenge ($499 value) and the semi-monthly newsletter about this challenge, send an email to: and tell me which address you would like it sent.

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