Think it’s too late? The world’s greatest fund manager didn’t make money until he was 52

Jim Simons had modest wealth at 52; now he’s worth $ 23 billion

Jim Simons

Financial markets — and risk taking in general — are largely the domain of the young. Early adulthood is the time to swing for the fences while middle age is a time for prudence, perhaps risking a manageable part of the nest egg.

Yet that’s not always true. It’s particularly untrue of some of the world’s greatest investors.

Among them is Jim Simons, the king of quants. Yesterday Gregory Zuckerman published “The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution.”

It details how a 40-year old math professor walked away from a job at Stony Brook University to try trading currencies. He had no idea what he was doing but raised $ 4 million with a few partners. He recruited renowned mathematicians to help him. It didn’t work and losses topped $ 1 million.

“If you make money, you feel like a genius,” he told a friend. “If you lose, you’re a dope.”

He gathered more data and persevered through the 1980s with a mixed record. In 1989 he lost 4%.

Finally, Simons along with recently recruited colleagues Henry Laufer and Elwyn Berlekamp, started to focus on short-term patterns — Monday’s price action often followed Friday’s, while Tuesday saw reversions to earlier trends.

It worked and the Medallion fund gained 55.9% in 1990. It hasn’t stopped. His fund as generated average returns of 66%, racking up gains of $ 100 billion. No other fund or manager is even close. A $ 10,000 investment 30 years ago excluding fees would be worth $ 40 billion today. Even after fees, it would be worth $ 195 million.

How the fund makes money is one of the world’s most-closely guarded secrets but it’s story isn’t. Simonds certainly had mathematical talents but he know almost nothing about markets when he started out at age 40 and managed to amass one of the world’s great fortunes.

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The winners and losers in Chinese yuan moves might not be who you think

Asian currencies aren’t particularly sensitive

Deutsche Bank is out with a report looking at which currencies are sensitive to large positive and negative moves in the Chinese yuan.

In the event of extreme positive or negative moves, it’s not nearby countries that would suffer, it’s the South African rand, Turkish lira and Colombian peso.

Negative CNH shocks: ZAR, TRY and COP are most sensitive to ‘extreme’ negative CNH moves, while SGD, KRW and PHP are least sensitive. Broadly, the analysis shows Asian currencies are amongst the least sensitive to negative CNH shocks, which likely reflects lower FX vol in the region. The fact that geographically distant currencies such as ZAR and TRY are most sensitive illustrates the systemic nature of CNH shocks to the market.

Positive CNH shocks: ZAR, COP and CEE3 are the most sensitive to ‘extreme’ CNH rallies, while SGD, KRW, PHP and INR show the lowest sensitivity. We find CEE3’s high sensitivity interesting, potentially reflecting the strong trade linkages between Germany and China.

That’s something to keep in mind when the yuan takes another leg down, or starts a rebound.
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If you think about trading USDCAD, take two aspirin and lie down until the feeling goes away.

Brutal up and down price action

Looking at the USDCAD price action of late, I am reminded of what an old colleague of mine at Citibank used to say when markets were particularly choppy. 

He would say “If you think about trading ____________, take two aspirin and lie down until the feeling goes away.”   

You can fill in the blank with the “USDCAD” of late.  There has been lots of choppy action including today’s run lower on the higher core CPI, and the snap back rally that erased the declines.  

Nevertheless, in the ugliness, is there any broader technical themes in play when you see such price action.  This is what I think:

  1.  Realize that anything is possible.  I am always looking for a break in an up and down market, but realize that there can also be failures
  2. On the chart, find technical areas that “seem” to be working.  Put faith that they will  give bias clues and levels to lean against to define risk, 
  3. Be humble and don’t fall in love with positions
Brutal up and down price action

Looking at the hourly chart of the USDCAD, the 1.32966 area was home to 4 swing lows (see red circles). Yes there was a failed break on April 9 (anything can happen), but subsequently the price level was reestablished as a low on Monday (red circle 3 and 4).  Key level. 

The other thing is the 200 hour MA (green line in the middle of the chart) has done a good job of dissecting bullish and bearish bias in the middle of the up and down range.

Finally, there is a double top at the highs (see green circles 1 and 2). That was yesterday’s “best trade”.

So what happened today?

The price fell below the 200 hour MA earlier and stayed below (bearish).  On the CPI data, the pirice tumbled lower and below the 1.32966. That is even more bearish. The price should have gone lower below the 1.32966 level.  It did for a little while reaching 1.3273 on the break. 

However, the price rebounded and then held the low from April 9 at 1.32832.  Having the mindset that “anything can happen”, a red flag goes up.  You gotta be careful. You also have to be humble and realize you can’t be in love with positions. 

So sellers shifted – despite the bullish news – and turned to buyers.  The race was on to the upside.  

The price rise got close to the 200 hour MA (green line) at 1.33454 (high reached 1.3339). Sellers may be leaning and hoping the price stays below.  

What now?

You always have the option to take two aspirin, lie down and wait for the trading feeling to go away. 

Alternatively, you can lean against the 200/100 hour MAs and hope that the buyers off the low, are sellers against the MAs above.  

The hope is the the price retests the 1.32966 level again, but remember, anything can happen and be humble.  It will help you make sense of horrible up and down price action.  If you are lucky and nimble from the homework, you may make a few bucks (but don’t fall in love with the position).  

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Sizing up market expectations in trading is more important than you think

A lot about trading is about anticipating what to expect


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One of the beauties of trading is that every trader has their own unique style and approach when going about their business in the market. Each and every one of us has their own trading compass. But even so, one of the most important skills to have as a trader is learning to read other compasses as well. And that means learning to gauge what other traders are doing or saying in the market; as essentially, that is what makes up market expectations in trading.

I remember about six years ago witnessing price action after the US non-farm payrolls was released, there was plenty of whipsaw and price volatility between 300-400 pips. Fast forward to today, you’ll be surprised to see a reaction in currencies that amounts to 50-60 pips on the same data release.

So, what has changed since six years ago? The main factor that is different now is that the market’s attention has moved away to focus on other details and market expectations have also changed as a result.

Back then, the labour market wasn’t as tight as it is now and markets are weighing up the possibility of the Fed normalising policy further as QE comes to an end. The non-farm payrolls data was at the forefront of that as it not only presented key measures such as the jobs print and unemployment rate (labour market conditions) but it also contained wages data (used to scrutinise inflationary pressures).

Now, it’s already a given that labour market conditions are holding up well in the US economy. Hence, there is almost little to no significance placed on the jobs print and any minor changes in the unemployment rate. The only key data is wages but with the Fed already confidently hiking to reach near neutral rates, it’s not exactly the blockbuster data it was two years ago.

Knowing what to expect ahead of economic data releases

One of the more common mistakes retail traders make is to attach a particular significance and expectation to upcoming economic data releases and central bank speeches. Instead of focusing on whatever scale/indicator that tells how “important” the data release is, knowing the background and expectations ahead of the data will help you position yourself better ahead of said particular release.

That’s one of the reasons I put lengthy paragraphs in describing those details in my economic data preview posts. It not only helps those new to the trading game pick up on the focus and expectations of markets but it also helps to write these stuff down to get better clarity of the situation.

So, what gives?

Prior to September, the two key focus areas of markets are a possible BOE rate hike in the summer and Brexit. Negotiations between the UK and EU on the latter wasn’t moving much but markets weren’t panicking or thinking about any no-deal scenario just yet as it seemed like talks would somehow produce a positive outcome around September to October.

Hence, the immediate and key focus of markets at the time was on the BOE. That is why solid economic data which helped to support the notion that the economy was doing well helped to give the pound a bigger lift as markets looked to price in an increased chance of a BOE rate hike.

As for recent data releases, we have all come to know now that Brexit developments continue to cast a large shadow over developments in the UK economy and the BOE’s plans. Hence, regardless of whether the data is good or bad, there is no certainty in saying that the data holds any significance towards UK economic outlook or the BOE’s capacity to hike rates.

This is because everything gets thrown out the window if there is a no-deal Brexit and further uncertainty will still continue to cloud the near-term outlook for the pound as there is still no clear outcome that will materialise from recent Brexit talks.

And that is why recent economic data releases don’t matter as much. They’re very much secondary to what the impact of Brexit developments can bring towards the currency and the economy.

Understanding what the market is saying

I’m going to be talking about this in relation to more of a knee-jerk reaction from markets towards economic data releases. Even when you anticipate and expect certain releases to produce a volatile reaction, how do you know which side markets will take after?

One of the more common plays in the rule book is “buying the rumour, selling the fact”. We’ve all seen this happen plenty of times in markets but what exactly does that mean?

I’ll use the Fed’s most recent decision as a good example of this. As we entered December, markets were pricing in a lesser chance of the Fed hiking rates in its most recent meeting; falling from ~80% to ~65% ahead of the FOMC meeting.

However, this was how the dollar performed in the build up from 3 December to 14 August:

It was the second best performing major currency despite the fact that markets were anticipating the Fed to turn more dovish in their commentary as they deliver yet another rate hike. Markets were preparing for a “buy the rumour, sell the fact” scenario as they bought the dollar up in anticipation of another rate hike but are looking prepared to sell the dollar as the Fed turned more dovish.

However, there was a twist in the tale as we entered the Fed decision week. The dollar came under selling pressure as markets then changed their focus and started pricing in a rather dovish Fed to follow. This was the dollar’s performance on 17 and 18 December, before the decision was made on 19 December:

The dollar was the second-worst performing major currency as it slumped against the major currencies bloc with markets anticipating that the Fed would pull off a dovish hike and possibly signal a pause to the tightening policy. The Canadian dollar was beaten down worse mainly to oil worries as it fell below $ 50 at the previous week’s close.

When decision time came, the Fed and Powell were indeed a tad more dovish but offered no signals that they would pause the tightening cycle any time soon. The immediate market reaction was to cover the earlier shorts and instead buy up the dollar.

Although markets eventually settled on a renewed focus of a dovish Fed, the immediate reaction shows the importance of anticipating and understanding what markets are saying before any economic data releases. In doing so, it will help give you an edge to your trading and understand why markets move the way they do.

Summary

In my view, the best way to go about sizing up market expectations is to be unbiased about it. We all have our views on each individual currency pair but it is important to be honest to yourself in gauging what the market is saying especially.

After all, the number one rule in trading is that the market is never wrong. So, hope this article helps you understand a little bit more about why it is important to stay abreast with any developments – big or small – that are happening to economies/politics and why we should always take note of what the market is saying, regardless of whether or not it goes against fundamentals, technicals, and any other analysis.

  • Always be aware if economic data releases are preliminary or final readings (the former tends to have the biggest impact more often than not)
  • Try and anticipate the key theme that the market is focusing on ahead of data releases i.e. post-ECB meeting, plenty of talks about ‘downside risks’ hence Eurozone growth-related data like PMIs become even more sensitive
  • For central bank speakers, try and find out what the speeches will be related to; a Draghi speech on regulatory risks isn’t as crucial as a Praet speech on markets and policy
  • Always prepare for the unexpected as we can all have certain views going into the economic data releases but never be too attached to them and be ready for the unexpected, and that includes central bank speeches too

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