Retail Currency Trading – Retail Forex

No escape, aka “Roach motels”

The asset backed commercial paper market is basically frozen currently as no one will trust these securitized vehicles because of the potential bombs they contain. This crisis in confidence is the direct result of the structure of these products in which they offer the investor “NO OPTIONS” to exit the trade. Until a way to exit is devised, global liquidity can be expected to continue crash. Let me thank John Taylor of www.fx-concepts.com for the excellent insights below. As a long time investment manager, his handle on history is extraordinary and his clients are undoubtedly well served by his experience.

What is a roach motel? As John explains,

“a box that lured the omni-present house hold pest, the roach, with tantalizing odors into its sticky interior, where it was entrapped, unable to move. Each box would catch hundreds of roaches that died slow deaths, stuck to the very stuff they desired. The catch line of the campaign was “roaches check in but they don’t check out” For us, as money mangers the name roach motel soon became attached to an attractive but complex trade that was easy to enter but was illiquid- i.e. there was no market price except when the trade reached maturity or when (and if) the bank that created the product decided to buy it back. If the investment situation changed and the trade was no longer the one you wanted, you were stuck- or at the very least the hedge of the position would be very expensive and imperfect, often drastically so depending on the circumstances”.

This is the perfect description for the current CDO/CMO/CLO markets as they offered the potential of higher returns than usually available on quality AAA and AA paper. The buyers jumped at them just as the roaches pile into the roach motels. John goes on to say that in the forex markets liquidity is assured. To have an illiquid currency market is to have a huge financial impact on a country’s citizens.

He then says: “It is completely different when dealing with structured products. There is no expectation of liquidity as the institution that created the product has no responsibility for it and is not directly impacted if the price collapses – or more likely is unknown. It is not their complexity that is the primary problem – IBM is complex but it is valued thousands of times each day – it is the total lack of liquidity in all these structures. However, if you add the extreme level of model uncertainty – i.e. it is impossible to value these structures as their have been no previous transactions – together with the lack of liquidity, you end up with assets that might be worth anywhere between 5% and 95% of their original value, it’s anyone’s guess.

“Roach motels or totally illiquid investments only appear when investors are so confident about the future that it never crosses their minds that things might change for the worse. Why else would someone totally ignore the value of his capital and only worry about the spread over the short term funding cost. Considering that there are far more that 100,000 instances of this capital uncertainty, from hedge funds to SIV’s to money market funds to banks to pension funds, there are a lot of problems still ahead. Global liquidity will crash until the day that these assets can be traded and values established. Now while liquidity is shrinking faster than the Fed is pumping it out, the dollar will be strong.”

Thanks again John (www.fx-concepts.com).

This about sums is up doesn’t it? Think of all the institutions, pension funds, banks, mutual funds, money market funds, SIV’s (short term investment vehicles), hedge funds, etc. who have checked in and can’t check out. The biggest money in the world and they didn’t ever raise a question of controlling the risk in the trade or how to exit the investment. Now it’s time to pay the piper as there is NO WAY OUT! Due to unbelievable amounts of overconfidence and hubris, the investors who placed their futures in their hands will be forced to pay the price. This finger of instability has a long way to run. However, you can expect it to be front and center in the headlines over the next several months until a market has been developed to discover the price they should have and a real marketplace for them to be exchanged.

This is an excerpt from TedBits – Copyright © 2007 Ty Andros — Portions of this document may be reproduced ONLY with full credit and contact information to Ty Andros at tedbits@TraderView.com and www.traderview.com

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Administrator note: I like this Roach Motel comparison very much. We are subscribed to this view since times immemorial (We trade forex since 1997). We are producing more than 100% annualised returns on the most liquid market: Forex Majors. Our performance is verified by The Trading Systems Authority.

Sometimes not trading is the best trade of all. Read on.

From The GotForex Weekly Newsletter, by Rob Booker

Trading currency is risky. You can sustain the total loss of your trading capital. In the midst of one of the most volatile periods in the forex market in the last 10 years, what are you doing right now to protect your capital? What are the top 10 ways you, every day, manage your risk? Your trading account doesn’t represent just the $500, or $1,000, or $100,000 that you have deposited. It represents possible future gains (or losses, of course). If you deplete all that capital on reckless trades, what will you have left to trade with?

It’s always better to sit on your trading capital than it is to use it recklessly. Big moves in the currency markets are exciting, for sure. Everyone seems to love a trend and loves even more to talk about how they caught a big piece of it. But we all know what it feels like to take one too many trades, or to risk too much on a single position, or to try to pick a bottom (or top) in the market and then find ourselves losing a significant amount of money.

Are you currently riding losing positions? Here are some thoughts. I can’t tell you whether you should open or close any specific trades. But as you think about your trades, consider the following questions: How does your current loss compare with what you expected to lose, based on the testing of the system you are trading?

If your system is not tested, and you do not know what the expected rate or size of losses should be, what can you do right now to find that information?

Have you shown your account to someone that you trust, an experienced trader, who can help you look at your positions and talk about them?

If you feel ashamed of having lost a great deal of money, consider what you can do to face that embarrassment head-on: it is better to deal uncomfortably with a loss in the open than it is to privately blow your entire account. Any pride you feel that you are protecting by not talking openly about your mistakes will, in the end, be a very expensive investment.

Remember that everyone has experienced losses. Even significant ones. Warren Buffett’s company Berkshire Hathaway is named for the textile company he invested in that became a sinkhole for money and cost him a great deal of time, effort, and capital. Any successful trader you speak to will frankly discuss the worst trades they’ve made and what they learned. These experiences have been, in some cases, more instructive and meaningful than even their most profitable trades.

I take a lot of flack at times for suggesting that you are better off speaking openly about your trading mistakes with other people. I don’t say that because I delight in hearing about your mistakes. I do it because if there is any possible way that you can find your way out of the losing trades you’re in, isn’t it worth it to actively and openly try to find that solution?

Are you currently experiencing unusually large gains? Here are some thoughts. There is nothing quite like the joy of making a good trade. We like to be right. We enjoy the thought that we planned, executed, and closed a position successfully. Here are some thoughts if you’ve recently found yourself in this fortunate circumstance:

Well done! Congratulations on the profitable trading!

Remember that your profits are only “on paper” until you take them out of your account. A close friend of mine accomplished the nearly unbelievable feat of earning profits of over $60,000 in his trading account earlier this year. He sadly lost all but $3,000 of that money, in a margin call, in just a couple of weeks – as he let the entire account slip away by making trades that were far too big. Princess Leia once told Grand Moff Tarkin, “the tighter your grip, the more star systems will slip through your fingers.” Substitute “pips” for “star systems” and you have yourself the beginning of a good book about trading psychology.

It’s easy to fall prey to the worry that you did not hold onto your winning positions long enough. Be careful about being ungrateful for the winners that you do have. Don’t let what you didn’t get spoil what you did get.

Just because you’ve had some good trades does not mean that you have “figured it out.” There is no holy grail of trading. Every trading system has its weaknesses. Be careful not to concentrate so much on the good points as to not pay attention to what can go wrong.

Consider using part of your profits as a “Research and Development” budget. With your profits, you may have bought yourself some time to test, fine tune, or otherwise improve your trading skills. I’m not saying you should spend your money on education, or books – or spend any money at all. Perhaps the profits simply give you some breathing room to sit back and deeply think about what you did that got you to this point where you have experienced some success. Learn from your success!

Most of all, please don’t become so accustomed to this huge market movement that you expect these huge trends to come along every week of the year. We are experiencing volatility that is off the charts, that is higher than anything we’ve seen in a long time. Most of the time, the market does not move like this – so please do not start to expect that the GBP/JPY is going to move 1,000 pips every day for you.

Remember: We’re here for you. You can call or chat with the IBFX offices anytime you have a question about your demo or live account, or even if you don’t have an active account with us right now at all. Although the representatives can’t tell you what to trade or how to trade it, they love to hear from you and to talk with you about how you are doing, what questions you have, and more. Thank you for taking this journey into trading with us.

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Administrators note: IBFX is respactable forex broker using MT4 trading platform . I have one of my accounts there. I recomended them already in my first post.