The ACD Method

justrading · Dec 15, 2013

Mav, you are a man of your word, a quality I respect. Need to give some thought to your point about using currencies to express other trades.

Meanwhile, to alleviate the 'pressure' from King, here is a song from possibly the best concert ever (I'm biased of course).

http://youtu.be/4-rkJmRiFug

cdcaveman · Dec 15, 2013

Quote from Maverick74:

Most of you guys have probably heard me say on here countless times, follow the money. Even if all you trade is oil or spoos, follow the money. The demand ALWAYS begins with the currency. Why? Because that is the unit in which your product is being bought. You may not realize this but when you buy AAPL, you are shorting the USD at the same time. Why? Because you trade actually looks like this: AAPL/USD. You are funding your purchase your AAPL shares with dollars. Most people won't notice this much of course because the price volatility in AAPL far outpaces the volatility in the Dollar. If you guys tracked FX movements more, you would be spotting the turns in Oil, ES and even AAPL much quicker then just staring at it's respective chart. This is because demand begins with the currency and then with that currency follows through to the transaction. Often I would hear on ET, why are people buying US Bonds that pay no interest. What many are missing is that our bonds are being purchased by foreigners that actually are really betting on our currency, not our debt. What they REALLY want to do is buy dollars and the bond is simply where those dollars are stored. So while it may seem that they are only making 3% to 4% on their money, they are actually making 10% to 15% by the time they sell the bonds and convert back to their currency. The demand for debt around the world is often derived for the demand in their currency. In the 1980's a killing was made with the purchase of Brady Bonds. These were debt instruments issued in Brazil and other South American Countries. The killing was made threefold. Their debt was paying huge interest rates. The principal value of their debt increased and lastly the value of the currency shot up. So for those of you who like to map out the big picture and analyze long term macro-economic trends, the currencies provide a treasure trove of information to dive into. If you follow the currency markets daily, you will have a far better understanding of the world, the market and where money is flowing into and out of. Ignoring this and you are simply trading the tail of the dog.

Let me use this last part to dispel some common myths or misunderstandings of currencies. Let me start by saying I truly believe currencies need to be traded with a long term view. That is not to say one cannot daytrade them, it simply means that all the things that benefit the long term trader tend to work against the short term trader. There is a lot of baseless noise intra-day that I feel is very random. Many on here will blame evil bucket shops for running stops and so on, when in reality, currencies are just erratic intra-day. They are prone to spikes anytime ANY news comes out in ANY country. The world never stops spinning and the news cycle for currencies never stops. Sure there are patterns intra-day but the product you are trading is deriving it's value from long term expectations. Having said this, the rants I often here about how wide certain spreads are become a moot point. If I'm trying to take 800 pips out of the USD/JPY do I honestly care if firm A is 1 pip wide, firm B is 1.5 pips wide and firm C is 1.8 pips wide? It matters not to the longer term trader. In fact, if you compare currencies to options, futures and stocks and use the commission + the bid/offer spread as your total cost, you will find the spreads in FX to be very tight. Another common remark I might get is, but Mav, with stocks I can trade 100's of different products and currencies there are just a few. Actually, the combinations of can easily reach 100 + and even if we eliminate the more exotic pairs, there are easily over 30 good pairs. Most people don't watch more then 20 to 30 stocks at a time or more then a handful of commodities. Then you have the FX is a scam crowd. Ignore all this. Yes, the FX "business" is full of scams and that is due primarily to the wild west mentality of the market and the lack of regulations. George Soros, Bruce Kovner, Bill Lipshultz and Andy Krieger certainly don't believe it's a scam. And this goes without saying, don't abuse the leverage.

Some of the structural benefits of FX are obviously no hard to borrows. Get long or short anything you want. No licenses to attain. Plenty of leverage. Cheap access to capital. Yes, you can actually get paid to put on FX trades. Because this business is so competitive, there are many brokers competing for your business which means there is a limitless amount of solid info out there. Live real time news feeds, real time economic reports all over the world, plenty of in depth analytics, all provided to you free of charge. Try getting that in the equity and commodity markets. Software is usually always free. Currencies are never halted. And yes, you can trade with the big elephant in the room, the central banks. It's very hard to know who the big elephant is in equities, but in the FX world it's the central banks and they actually TELL you what they are going to do BEFORE they do it.

Let me add one more thing here. I talked about putting trades on for free. While rates are low now, eventually they will go back up and one of the best trades going when they do is creating all the various carry trades. This is where you can borrow money for free in one country and get paid higher interest in another country. With a little bit of leverage, these trades can produce far better revenue streams then the old fav naked option selling or iron condors. Much easier to manage as well. And much better margin. Now on a closing note before I move over to the newbies. I'm no where in here implying there is some kind of edge in this product that does not exist elsewhere. This assumes a constant edge. Meaning whatever you are using in one market to analyze and make trades, you can use in this market. Here with the context of ACD, I'm saying ACD models very well with currencies. No one is handing out free money. And yes, trading FX requires all the long hours of research you would have to put in trading other products. Currencies give you all sorts of ways to replicate trades you might want to express in other markets. For example if you want to express a view in interest rates, stock prices, commodity prices, being long or short risk, being long or short volatility, etc. All these ideas can be expressed with various currency pairs. For example, many people are buying the USD/JPY as a way to be exposed to long Japanese equities. They are the SAME bet. Many people were shorting the AUD/USD as a way to short Gold without the volatility one has to endure in Gold. Many trades found unique ways to short US equities without having to endure the constant rally in US equities by trading an FX pair that behaved the same way as an ES short without the drawdown. The opportunities are endless. I could go on about how to use options in FX but I'll save that for another time.

The next segment will be for the newbies...
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Great!!! Would love to hear about options... I love the synthetic relationships you describe

eurusdzn · Dec 15, 2013

Thank you , Sir.

cdcaveman · Dec 15, 2013

So I've heard crude oil spreads extract out dollar risk out of the trade... But how does crude have dollar risk when its not just something specific to the US

justrading · Dec 15, 2013

Quote from cdcaveman:

So I've heard crude oil spreads extract out dollar risk out of the trade... But how does crude have dollar risk when its not just something specific to the US
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Isn't it always priced and paid for in dollars?

cdcaveman · Dec 15, 2013

Quote from justrading:

Isn't it always priced and paid for in dollars?
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Um no... The use crude around the world and pay for it in all currencies I'm sure

Maverick74 · Dec 15, 2013

Quote from cdcaveman:

Um no... The use crude around the world and pay for it in all currencies I'm sure
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Actually no, crude is priced in something called petro-dollars. They are crude barrels over dollars. I believe they are about to if not already going to offer petro-euros. This means that EVERY country in the world has to convert into dollars to purchase oil. The Saudi's are NOT interested in currency risk.

http://en.wikipedia.org/wiki/Petrodollar

http://www.investopedia.com/terms/p/petrodollars.asp

And I'm referring to Saudi Oil in this example obviously.

Maverick74 · Dec 15, 2013

http://voiceofrussia.com/2013_10_27/The-beginning-of-the-end-for-the-petrodollar-2572/

http://www9.georgetown.edu/faculty/imo3/petrod/petro2.htm

Some more useful info...

running_bare · Dec 15, 2013

Do you express your long term currency trades in futures, FX or options?

Maverick74 · Dec 15, 2013

Quote from running_bare:

Do you express your long term currency trades in futures, FX or options?
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Mostly in cash.