FEBRUARY TRADING UPDATE

Updated: 03/09/2009 20:00
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February was a difficult month for trading. The currencies stayed in a tight 2.5% lateral corridor along their November 2008 support levels

February was a difficult month for trading. The currencies stayed in a tight 2.5% lateral corridor along their November 2008 support levels. Just to give you some recent historical perspective, the dollar paired currencies had moved up against the dollar by approximately 10% in December (greater than 5% move in any direction is good for trading), but this seemingly significant upward move proved to be short-lived when the these same currencies fell more than 10% in late December/January to retest November’s support (because this southern move was also greater than 5%, it was also good for trading). February, by contrast, contracted greatly.

These same Dollar (and Swiss) paired currencies vacillated up and down in a random 300 pip corridor along November support levels – with their respective support levels holding despite the fact that the Dow Jones had fallen further south than it did in November (for the last 12 months significant moves of the Dow Jones had a direct bearing on the currencies except for this last month, an interesting deviation).

For instance, EURUSD had formed a November support of 1.2500 when the Dow Jones had reached its own support of 8000 at the same time, but when the EURUSD retreated back down to the 1.2500 support levels, that support held somewhat firm during February (EURUS vacillated from 1.2500 to 1.2800), whereas the Dow Jones had broken through its earlier November support to fall to 7000.

Whenever the markets contract into a random 300 pip or 2.5% lateral corridor, the environment becomes akin to WW1 trench warfare. Breakout and trend strategies need direction that can be sustained for more than 3% to capture profit, but when direction is not sustained and mini reversals happen at random, each one lasting no more than 200-300 pips, then attrition sets in as breakout and trend strategies cannot lock in profit and must bail out at breakeven or stop loss. ]

When a series of breakevens and stop losses accumulate for more than 4 weeks across all the dollar paired currencies (at least for most time intervals greater than 60 minute) then we have the present situation of an approximate 15% draw down. The yen cross paired strategies made some decent gains during this period but because they only represented 25% of the market portfolio, they could not completely offset the corridor/consolidation based losses from all the dollar (and Swiss, also stuck in range) paired strategies.

On the upside, no market can be range-bound indefinitely and sooner or later there has to be break to the downside through support or the support becomes firm enough to make another bounce upward from. When either of these two situations happens, there is often a big 5-10% move, and our systems are geared to capture any 5-10% directional move, up or down. We are hoping this will happen in March – because March as a month is often seasonally dramatic, in the same way that February is seasonally lethargic.

In the background we are working out a way to be more resistant to range-bound corridor activity, a way to fight back and profit even in a currency trench. We have found that our smaller interval strategies (15 to 120 minute) perform better in this environment: the smaller the strategy interval, the better ability it has to fight in close quarters.

We will be giving more weight to those strategies that had been able to profit consistently in such trench warfare – as well as at all other times. These are not necessarily counter-trend (range related) strategies but instead breakout and trend related strategies that are able to consistently profit from intraday breakouts and trends.


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