Trading Both Sides of the Market

Last weekend I was in Madrid for David Aranzabal’s annual Forex Day conference and as always it’s my favorite trip of the year. I love the food. I love the people. I love the city. I love the casual elegance of European way of life. But mostly I love hanging around traders talking markets.

Two of my colleagues Asharf Laidi and Rob Booker were presenting as well. In the heyday of retail FX growth before the GFC we were on the road always and used to see each all the time. Now we are all older, settled with kids and don’t around as much anymore. So it was a pure pleasure to catch up.

Each one of us trades in a radically different style. Each one of us has seen almost every imaginable market possible. And I think it is fair to say that as we grew older, each one of us has become much more humble in our approach to trading. That humility was evident when we sat down for coffee to discuss our specific techniques and discovered that we all do the same thing — trade both sides of the market.

Ashraf is a classic techno-fundamentalist macro trader who can hold positions for months at a time. Such tactics require not only patience but the ability to withstand being wrong for hundreds of pips until your thesis plays out in the market. Ashraf noted that unlike in his younger days when he would stubbornly hold his view through long periods of drawdown, now he fully accepts being wrong in the near term and actually scalps ⅓ to ½ of his position in the opposite direction. This way he constantly reduces his cost basis on the initial idea making it even profitable when the market finally turns his way.

Robbie has a completely different approach essentially trading mean reversion with tiny, tiny size and a portfolio approach that often puts him on the opposite side of the market with similar pairs. He does not use stops and lets the offsetting trades net out to a positive return. He also does something very clever. He always makes sure that he is on the positive side of the carry. He told us a story of a short EURTRY trade that took 2 YEARS to resolve. During that time he lost 2,000 pips on the position as the lira disintegrated, but at the same time collected 3,000 pips in swap making the net position profitable in the end.

Unlike Asharf and Rob, I am much more of a classic algo-driven trader with exact entry and exit rules. And since I have the attention span of an ADD-addled 5-year-old, I generally never hold my trades more than 24-48 hours so my algos operate on a much shorter time frame. Yet, I too often find myself on both sides of the market. At least once or twice a week, one of my algos will open a long in some pair and when the price action goes against me will open a short in the same pair in a different account. This freaks BK members out as they can’t understand why I do that — but the fact of the matter is that algos have picked up the signal that market conditions may have changed and while my “wrong” trade will most likely be stopped out — my offset trade will take some of the string out of the loss by banking pips the other way. This by the way not only works on a granular level but on the portfolio level as well as sometimes Kathy’s strategies will take the opposite side of mine and will mitigate losses as well. It is, I think, the primary reason why the retooled BK service has been so successful lately making 1300 pips in past four weeks as contravening positions keep drawdown to a minimum and overall return positive.

They say that a true sign of intelligence is to be able to hold two contradictory concepts at the same time. There is no doubt that that principle holds true in trading as well where mental flexibility and psychological humility are the two key factors in long term success.