Confessions of a Forex Trader - Part VII: An Illustrative Wrap-up

Expert: Mihai Nichisoiu, Private currency speculator at Mihai Nichisoiu

Topics to be covered during the session:

• Risk versus leverage
• Personal attempts to accommodate a tight
• Deconstructing past currency speculations

Summary:
- Risk versus leverage in margin-traded currency markets
- Personal attempts to accommodate a tight and rigid risk approach in
higher-stake currency speculations
- Deconstructing past currency speculations

Who is Mihai Nichisoiu?
Mihai Nichisoiu started to trade currencies first in the local futures market, then in early 2002 moved to dealing in the wide foreign exchange. Since the beginning of 2004, Mr. Nichisoiu has become mainly engaged in building a personal long-term track record in the sense of posting high rates of return only if at the expense of tight and rigid approaches of risk. Mr. Nichisoiu won the August 2005 edition of a popular global demo trading contest, after constantly achieving top rankings during an 11-month long participation.

As a currency speculator, Mr. Nichisoiu is also actively involved in managing and consulting a small number of long-term private connections.

FXstreet.com has been hosting a short, frequently updated market report signed by Mihai Nichisoiu eversince January 2004. Mr. Nichisoiu can be contacted via his recently established, personal website MihaiNichisoiu.com.

Sessioin Material:

Situation #1:

During early May 2006 I did have some observing interest (although not nearly one blowing out of proportions) for the down movement that was slowly taking place in the EUR/GBP.

Then, on May 17th the Euro fell terribly versus both the British Pound and the Swiss Franc. I checked some of the financial media, and it looked like the French Finance Minister had just talked down what particularly during those weeks was considered an un-wanted strengthening of the Euro currency. On that day, I was ending my daily letter to some private connections writing that although my generic interest for that period was to position myself in one of the main USD markets, actually the very next trading opportunity could surprisingly occur either in the EUR/GBP or a Japanese Yen cross pair.

In the light of that freefall the EUR/GBP saw on May 17th, alongside that French official's statement - well, the 'harami' chart pattern that would shape the ensuing 24 hours appeared to me as an intriguing anomaly. It was not only the 'harami' gradually becoming apparent in the EUR/GBP (daily chart wise) that was seriously catching my attention - but another one of the Euro's crosses, the EUR/CHF, stamped its daily chart on that same day of May 18th with a '2B bottom' sort of reversal.

Instantly I knew it was time to buy, and buy aggressively.
The result of my long EUR/GBP position taken on May 18th, although not quite spectacular in its raw measure of pips, did provide my accounts with an welcome and reasonable capital gain (following daily chart of the EUR/GBP and the EUR/CHF copyright NetDania.com, data feed: FXCM).

CHART: file attached 'eurgbpchf'

Situation #2:

May 2006. The main European currencies had already surged across the board, gaining hundreds of pips versus the weakening US Dollar within a fairly short period of time.
The Canadian Dollar made no exception, as the currency was overextending to new historical highs against the US Dollar. The frenzy of CAD buying was already feeding on itself at a time the standard question I kept on receiving was when precisely would I begin buying myself.

I, however, had a different view, and in late May I was already prepared to take the opposite position.
While watching charts of highly liquid markets, developments that are most supposed to raise my attention should consist of three main phases chronologically ordered as follows: 1) a steady trend, 2) the trend getting 'out of hand' i.e. price action becoming overstretched, sometimes parabolic, 3) the occurence of an 'anomaly' with potential to damage, sometimes even reverse the trend, offering me as well proper terms of a counter-trend positioning engagement.

Watching the performance of the USD/CAD market over the second half part of May, on terms of my own perception I had already been able to recognize the phases 1) and 2), and there I thought I was ready to encounter the climax of the whole sequence i.e. the 'anomaly' of phase 3).
That 'anomaly' eventually became apparent on May 31st, technically translated into a '2B bottom' appearance on the currency pair's daily chart (following chart of the USD/CAD copyright NetDania.com, data feed: FXCM).

CHART: file attached 'usdcad'

In my eventually reinforced view, that day of May 31st could have been truly special, announcing the possibility of a notable point of price inflection to be printed, one perhaps of a multi-decade historical importance.
I went long the USD/CAD in the late US hours of that same day; nonetheless, my prompt eagerness to add a second position only several days after the original entry and then consolidate an interim, trailed stop-loss order happened to be a tad more sophisticated way to play the whole bullish stance.

Far from me thinking that sophistication is in itself a bad idea; after all, I collected good profits from short-term trading the US Dollar quite more sophisticated than usual in mid December 2005 as well as last year in mid March.
My early June 2006 complicated dealing in the USD/CAD, though, definitely was not inspired, and perhaps it stood out as my biggest trading mistake of last year.

Then, the late June - early July bullish reversal of the NZD/CAD cross pair would have been even more challenging as an opportunity, since the event had as technical precursors the late May '2B bottom' of the USD/CAD, and the late June '2B bottom' of the NZD/USD - therefore, one of my most favourite chart patterns and trading setups occuring in two different USD-based markets at approximately the same time of the year, technically hinting at the possibility of a significant appreciation of the New Zealand Dollar against the Canadian Dollar.

Since early July 2006, the NZD/CAD cross pair has up to very recently surged for more than 1,200 pips (following charts of the NZD/USD and the NZD/CAD copyright FutureSource.com).

CHART: file attached 'nzdusdcad'

Situation #3:

I had stayed bullish on the main European currencies against the Japanese Yen over the last months of 2006 - although, as already admitted on ocassion, for several reasons I would have found particularly difficult to accommodate that stance via an effective trading participation.

Part of the rationale for my already multi-month bullish view I had had of the JPY cross pairs was purely intuitive - though, intuitive in a contrarian sense. The more 'obvious' the Japanese fundamentals became in the public perception and the louder the demand for a 'logical' causative relationship to be reinstated in the JPY markets - the higher the JPY cross pairs, I thought, could extend further.

In the daily chart timeframe, last year during September - October price behaviour of the Swiss Franc and the Euro against the Japanese Yen took a 'triangular' shape - therefore suggesting a continuation of the Japanese Yen downtrend via its cross pairs could have likely been underway. The GBP/JPY did not stamp its own daily chart with a 'triangle' - although in a November 14th note to clients I came to write: 'I wonder whether the depreciation that we have seen today in the GBP/JPY could actually trigger the terminal leg of an A-B-C type of correction that might have started on September 1st.' (following charts of the EUR/JPY and the CHF/JPY copyright FutureSource.com; chart of the GBP/JPY copyright NetDania.com, data feed: FXCM).

CHART: file attached 'eurchfgbpjpy'

Moreover, I suspect - again, intuitively - that the market appeared to be hugely short USD/JPY at the level of the currency pair's October highs, an assessment apparently confirmed by series of sentiment / positioning indicators and surveys of various retail FX brokerage houses. That explains from a certain, contrarian angle why the US Dollar did not lately register the same dramatic down movement versus the Japanese Yen as it did relative to other major currencies, as well as the price constriction and then the surge of the main European currencies against the JPY.

A much earlier in the year, Japanese Yen bearish call however I had made regarding the NZD/JPY cross pair via my letters to clients (as well as in my yet infrequent notes published on FXstreet.com) - as I thought an 'important bottom' could have been established in the 70 - 69 area, followed then by a 'sizable recovery'.
Such a scenario of price direction and momentum eventually proved right, but it was not for the first time that I came to perceive a very specific configuration of technical conditions that would lead later on to a notable market outcome.

Approximately 3 years ago - in early November 2003 - I had the perception, based on a comparable price configuration, that a multi-month selling frenzy was just about to exhaust itself in the EUR/JPY market. I decided then to place an order to buy the EUR/JPY on limit at 125.00 - and the market executed that order putting me in a long position on November 10th. I also had a firm profit target, set beforehand at 133.00 - that eventually locked in a profit of 800 pips straight on December 16th.

The EUR/JPY would, however, steadily climb up further for another almost 500 pips up until it found an interim top in early January 2004 (following chart of the NZD/JPY copyright NetDania.com; chart of the EUR/JPY copyright NetDania.com, data feed: FXCM).

CHART: file attached 'nzdeurjpy'

Situation #4:

The single most reasonable explanation part of the financial media came out with following last week's Japanese Yen movement was money fleeing back to Japan in search for imminently higher interest rates.
I know markets (let alone the financial journalism) can be inconsistent, but that inconsistent to the point of shifting from a frenzy of selling to a frenzy of buying in a matter of days if not hours, stirring around a 'fundamental' premise that has virtually remained un-altered - well, that I must say is leaving me in a bit of wonder.

My own take on the latest days is there may be no reasonable 'fundamental' explanation capable of deconstructing the Japanese Yen upwards movement, or at least the very start of it (although taking this statement as a generalized denial of fundamental analysis would be hazardous).
I believe now what I suspected several weeks, even months ago it could happen, I believe the Japanese Yen might have already acquired a certain 'critical mass', a state of severe disequilibrium sufficient in itself for a serious rearrangement of market forces to happen, one that would not any longer need 'fundamental' triggers or catalysts.

For Reuters nowadays, it is no longer just the Japanese Yen - it is the 'low-yielding' Japanese Yen.
Such attributes the financial media uses during certain stages of reinforced trends have a long, established history of backfiring when the markets least expect it.

I am not an astute forecaster or even commentator of fundamental events and developments - as I also like to think the next major move in the JPY cross pairs will prominently be a technical one i.e. a sudden rearrangement of supply and demand would be triggered mainly as a result of overstretched conditions that have grown embedded in the price itself.

If I early last month were to think of 'fundamental' surprises possibly underway, though, I could primarily think of two: Japan hiking interest rates during December, and / or China revaluing the Yuan ahead of the pre-scheduled, December 14th - 15th visit of U.S. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke in Beijing.

Latest weeks, however, have come to reinforce that the ways in which I observe and stand prepared to deal in the highly liquid currency markets remain mainly technical. None of my recent 'fundamental' hunches proved right - as China did not revalue the Yuan, and the Bank of Japan eventually decided to leave interest rates unchanged despite some intriguing chattering several central bank officials had promoted beforehand; still, each and every time I as of late advised myself against placing an early bet on the Japanese Yen, my reasons were all of a technical nature.

Ultimately, my decision to sell short a Japanese Yen cross pair will still be mainly a technical one. There should be no 'fundamentals' decisively triggering a positioning engagement unless a certain price configuration and proper terms of risk present themselves. But that basic positioning premise certainly does not stop me from spotting anomalies and virtual elements of surprise within the 'fundamental' background as well - on terms of my own perception, of course.

Reuters utilizing these days the attribute 'low-yielding' with regard to the Japanese Yen - a 'fundamental' stigma more often than not associated with maturing trends and an overextending market environment - is the financial media's ultimate acknowledgment of the 'obvious'.

But according to another, far wiser and more successful Eastern-European, money in the markets is made by discounting the obvious and betting on the unexpected.

Session Transcript

FXstreet Moderator (Jan 9, 2007 8:48:13 AM)
Good morning, good afternoon, and good evening to all of you joining us today from different parts of the world. I want to welcome all of you to today's Live Forex Expert Question and Answers session.

FXstreet Moderator (Jan 9, 2007 9:00:03 AM)
Welcome to FXstreet.com Q&A Forex Session. Today’s session will start in 5 minutes.

FXstreet Moderator (Jan 9, 2007 9:00:25 AM)
Meanwhile we recommend you to read the speech material that you can find on your left window.

FXstreet Moderator (Jan 9, 2007 9:00:37 AM)
This Q&A Sessions allows users to start asking live questions from the very first moment of the chat.

FXstreet Moderator (Jan 9, 2007 9:01:38 AM)
Please prepare any questions you may have for the expert. Thank you for joining today’s Q&A Session.

FXstreet Moderator (Jan 9, 2007 9:03:21 AM)
Welcome to the Session. Today I am delighted to welcome our guest speaker Mihai Nichisoiu, Private currency speculator at Mihai Nichisoiu.

Mihai Nichisoiu (Jan 9, 2007 9:05:59 AM)
Hello, and welcome.

Mihai Nichisoiu (Jan 9, 2007 9:06:10 AM)
I am Mihai Nichisoiu.

Mihai Nichisoiu (Jan 9, 2007 9:06:32 AM)
I cared to conclude today the series of Q&A Live Sessions titled 'Confessions of a Forex Trader' here on FXstreet.com with an illustrative wrap-up.

Mihai Nichisoiu (Jan 9, 2007 9:07:20 AM)
Basically, what I wanted for today was to isolate and deconstruct several market situations that have most raised my observing interest over the latest months, as well as review personal trading experiences and the rationale that at the time stood behind them.

Mihai Nichisoiu (Jan 9, 2007 9:08:06 AM)
Since the space and time reserved to this Session are limited, the introducing text - which in my opinion is already quite substantial - consists of only four market situations.

Mihai Nichisoiu (Jan 9, 2007 9:08:34 AM)
The first three of them are instances of the past, their outcome is already well known and can easily be measured against the original perceptions.

Mihai Nichisoiu (Jan 9, 2007 9:08:55 AM)
The fourth situation presented in the text, however, has yet to generate a market outcome.

Mihai Nichisoiu (Jan 9, 2007 9:09:58 AM)
Please note that past performance, trading experiences and perceptions are not indicative for the future. Market transactions, whether or not operating on margin, bears a tremendous risk of important financial losses.

Mihai Nichisoiu (Jan 9, 2007 9:10:52 AM)
I am now ready to answer several live questions that may start being addressed.

PureGuesswork (Jan 9, 2007 9:15:10 AM)
I notice that while your trading decisions are primarily technical in nature, you are aware of fundamental conditions as they effect the "psychology" of the market, what John Percival refers to as the prevalent "scenario". Could you comment on that?

Mihai Nichisoiu (Jan 9, 2007 9:19:03 AM)
If I remember it well, John Percival had this theory of the 'prevalent scenario' where virtually one may be able to isolate, and then bet on it as the implied scenario is getting increasingly more attention from the public and the trend matures itself.

Mihai Nichisoiu (Jan 9, 2007 9:22:02 AM)
In turn, I tend to focus on what I sometimes call 'fundamental stigmas' when the 'prevalent scenario' is already widely recognized and the trend seems to be getting 'out of hand'. But once I come to place a counter-trend bet, I am not always aware of the 'new scenario' - in fact, I could securely say I am not aware of the new 'fundamental stigma' in most of the cases.

Mihai Nichisoiu (Jan 9, 2007 9:26:28 AM)
You are right when saying my market entries are technical - which actually helps me reconcile the initial projections of risk which themselves are the most prominent in the beginning stages of holding a position. But in fact I can never perfectly isolate which is the technical component of a bet, and which is the fundamental one. For example, I will never draw a chart, annotating a 'triangular' pattern - and write something like 'I am buying this currency because my technical software tells me to do it'. Instead, there are always what I like to call 'shades of shades of ideas' that make me act in a certain way.

PureGuesswork (Jan 9, 2007 9:26:51 AM)
So your example of Reuters referring to the yen as the "low yielding yen" is an example of that fundamental stigma.

Mihai Nichisoiu (Jan 9, 2007 9:28:23 AM)
Yes, but that does not mean I am referring to Reuters in any ironical, or negative way whatsoever. As a matter of fact, I have a great respect for the financial media, and for Reuters in particular.

Mihai Nichisoiu (Jan 9, 2007 9:30:03 AM)
However, Reuters dropped that combination of words during the second half of December, which at that time made me quite reluctant to place what I considered then an early JPY bet.

Mihai Nichisoiu (Jan 9, 2007 9:32:56 AM)
Another related example which is not given in my text is, reportedly, the December 2nd, 2006 cover of the 'The Economist' - highlighting the renewed USD bearish sentiment. However, only a few days in the afterwards the USD/JPY came to establish a point of price inflection, daily chart wise, from where the pair surged until recently for almost 500 pips upwards.

Mihai Nichisoiu (Jan 9, 2007 9:34:30 AM)
You may say I read perhaps hundreds of texts every week, but I am only in search for very specific combination of words. Most times I encounter nothing 'anomalous' at all - but that is fine, because I am not a high-frequency market participant in the first place.

Guest_Sue (Jan 9, 2007 9:35:01 AM)
Your counter-trend bet with Harami: successful rate of frequency?

Mihai Nichisoiu (Jan 9, 2007 9:37:34 AM)
There were other 'harami' confirmed instances, like the days of October 4th, 2005 in the EUR/USD, or February 3rd, 2006 in the EUR/JPY, or (if I remember well) September 1st, 2006 in the CAD/JPY - all of them daily chart wise.

Mihai Nichisoiu (Jan 9, 2007 9:39:41 AM)
The fact is, the 'harami' is considered by most technicians as rather a low-reliability signal, and I cannot argue against the pure theory. However, I am always less interested in the signal itself, and a lot more interested in the 'context' of its appearance.

Mihai Nichisoiu (Jan 9, 2007 9:41:52 AM)
I am often attracted by a 'harami' occurence in an overextending market- mainly because the idea of a reversal can be played with an initial stop-loss order of a very small size (as in its raw number of pips). The few past instances I have listed above were great examples in this regard.

Mihai Nichisoiu (Jan 9, 2007 9:44:46 AM)
But if one asks me which is the 'intrinsic' frequency of sequence of any chart pattern or trading setup - I am afraid I just do not have an answer. As a matter of fact, with me the whole idea of 'frequency of success' poses no importance whatsoever, and I believe the notion has far less relevance for the trader compared with what the public thinks about it.

Mihai Nichisoiu (Jan 9, 2007 9:47:38 AM)
[In my very latest reply, at some point what I meant to write was the 'intrinsic' frequency of success, not sequence. I apologize for the typing mistake.]

TomKat (Jan 9, 2007 9:49:54 AM)
Are there other price/chart patterns that you would consider as an "intriguing anomaly"?

Mihai Nichisoiu (Jan 9, 2007 9:50:24 AM)
I guess you mean aside from the 'harami' and the '2B bottom / top'.

Mihai Nichisoiu (Jan 9, 2007 9:55:22 AM)
Yes, as a matter of fact absolutely each and every chart pattern mentioned in any good book of chart pattern analysis may suit. For example, my bullish NZD/JPY call that I made back last year in May - June was technically based on a severe 3-wave exhaustion, also as I at that time recalled the bet that I placed on the EUR/JPY in November 2003, and that bet was constructed out of a comparable price configuration.

Mihai Nichisoiu (Jan 9, 2007 10:00:16 AM)
But I must reinforce that the most important ingredient of what I do is the simple observing interest. The only personal edge that I can think of is in actually standing aside from any action during most of the time. Then, I concentrate on certain markets that exhibit certain features - and that, I am afraid, can hardly be deconstructed in an algorythmic manner, or anything alike. The entry signal in itself is definitely not the entire rationale of being in a market.

Mihai Nichisoiu (Jan 9, 2007 10:05:45 AM)
So there are certain phases that I concentrate upon while watching a given market's performance, and the 'entry' is only the last one of those phases (and I have not even mentioned anything about the risk considerations). I believe such an approach is quite different from what a vast segment of market participants adhere to, because the public almost always enjoys starting actually with the 'entry' and all its beforehand virtues.

Mihai Nichisoiu (Jan 9, 2007 10:07:46 AM)
Thank you once again for your time and participation. I honestly believe the live questions were great.

FXstreet Moderator (Jan 9, 2007 10:08:00 AM)
That’s all we have time for Today .Thank you very much for that Mihai.

Mihai Nichisoiu (Jan 9, 2007 10:08:09 AM)
For any information, or private work - please visit my own website: MihaiNichisoiu.com.

Mihai Nichisoiu (Jan 9, 2007 10:08:19 AM)
Have a good time.

FXstreet Moderator (Jan 9, 2007 10:09:14 AM)
Thank you all for your participation. See you all soon!