EUR and GBP comment from NAB Currency Strategist Nick Parsons. – A psychological twist on market/investor behaviour.

I do not normally do market commentary or calls on this blog. – Though I have made the odd attempt, most notably, here on Apple Inc last April, a call which was wrong, being 6 months too early; such is the difficulty of timing bubble tops, and here on the EURUSD and EURSEK, from last August which proved nice timing, and a profitable little trade for me (See update on this chart at foot of this article.  – However, today I am adding a comment from yesterday from my one of my favourite currency strategists,  Nick Parsons of National Australia Bank. Nick is that rare breed, an economist who thinks about the market in terms of sentiment and positioning, as well as fundamentals and macro factors. Nick is well aware that markets are not just moved by the news and data released, but by the fears and desires of spectators as individuals and groups. More precisely, speculation is less about what you think, and more about what you think everybody else is thinking and doing. Those of you familiar with the work of John Maynard Keynes will of course recognise this as akin to the Keynesian Beauty Contest. – I hope you enjoy his article.

Friday, February 01, 2013 8:39 AM Subject: Nick Parsons-Daily Market Commentary February 1st 2013
Honoured as I was to be speaking at London ACI last evening, I was asked at what point the EUR would stop going up. The smart answer to this question requires neither a level nor a timeframe. Instead, I replied the euro will carry on rising until everyone owns it. When the last buyer has bought and there are no potential buyers left, then it will stop going up. We appear not yet to be at that point, mostly because there are some exceptionally bad investors and perverse incentives out there. 

In the fourth quarter of 2012, it was virtually impossible to find anyone with a benchmark weighting in the euro. Bulls, meantime, were simply non-existent. Even those people who could have been persuaded to scale back their short positions were afraid of doing so lest they got it wrong. The fear of being wrong completely overrode the desire to be right. (Ed: Underline emphasis added  to highlight the psychological aspect here). Looked at another way, making five big figures profit might not have brought a bonus but a five big figure loss would probably have led to the sack. After all, wasn't it obvious to everyone that the euro was a doomed project, set imminently to collapse? Being short the euro was the job-preservation trade. Since the middle of last year, our end-2012 forecast for EUR/USD was 1.33 and I lost count of the number of disbelieving, aggressive shakes of the head and vitriolic abuse this view was generally met with. Well here we are above 1.35 and despite a rush to buy euros given the freedom that a change of calendar year can bring, portfolio flows probably still have further to go, not least since some very big name houses are still peddling a sub-1.20 view to their unfortunate audiences. But, just as a currency goes up until the last buyer has bought, so it can go down until the last seller has sold. Our bearishness on the formerly proud pound has been well-documented here and elsewhere. That old maxim "never buy a pound you haven't already sold" still rings loudly on these old shoulders. Unfortunately, it appears in the very near-term that this view - and, crucially, this position - is now held not just by every forex professional, but every spread-better, taxi-driver, journalist and commentator. The pound has fallen a long way in the last 10 weeks, not just because the UK economy is an absolute dog, but its prior status as a supposed safe-haven goes into complete reverse if no-one now wants or needs one. Nothing whatsoever could persuade me to recommend a long position in sterling from current levels. Indeed, the likelihood of more dreadful data on retail sales, industrial production and retail sales during February and the BoE QIR Press Conference on Feb 13th will probably be fresh sterling negatives. At a time when everyone appears to now have the same position; however, it's quite possible that today will be the day we get to exit our short position. Fingers crossed, then, for a lousy PMI number at 09.30.

P.S.1

GBP PMI was weaker than expected, and GBP suffered another very poor day's price action. 

P.S. 2 

Below is an update to the EURSEK(EURUSD) comparison v Bund chart mentioned above.

"Euro Sign And Up Arrow On Screen" Image courtesy of Stuart Miles at FreeDigitalPhotos.net

Our Brains were not designed for Trading.

It has long been a contention of mine, that one of the problems traders face is the incompatibility between how they (we) would like to believe their brains and minds work, and how they actually do work. - The human brain has evolved over many millions of years, going back to when our ancestors walked the open savannah, lived in caves, and existed in a range of challenging natural environment. Including when they existed in various different forms such as; apes, monkeys, and the various species which pre-dated them. - The modern human brain is of course slightly but significantly different; it has evolved a highly developed frontal cortex, which enables us to think, abstract, reason and rationalise, something which, we believe, enables us to ascend above all other creatures, and has allowed us to create the world we live in. Nonetheless, our default operating system, and in particular our response to threats and opportunity, rely very much on our ancestral inheritance. This is why we will often do the things we do, which we then question a little later in a moment of reflection as to 'Why the hell did I do that', or words to that effect. It is also why we are able to hit the brakes on the car in that split second when the car in front brakes sharply, even though the brain has not yet actually registered that the car in front has braked. - Yep! We are not as in control on a conscious level as we like to think we are.

The excellent ‘Big Picture’ blog has this morning posted an excellent article called ‘This is your brain on behavioural economics’. However, previous to that it also posted an excellent series of slides entitled ‘This is your Brain; this is your Brain on Equities’. They are well worth looking at to gain a greater understanding of some of the aspects that our brain does well, and not so well, and the challenges and hurdles we face in trying to be successful in the financial markets. 

Links:
This is your brain on equities:
This is your brain on behavioural economics.

 

'Human Brain' Image courtesy of dream designs at FreeDigitalPhotos.net

 

 

'Hedge Fund Journal' Article: Coaching and Continual Improvement Challenging the behavioural aspects of trading performance

The excellent 'Hedge Fund Journal' magazine has published an article I wrote for them on Coaching and adopting a philosophy of 'Continual Improvement' in the financial markets. Registered users of the Hedge Fund Journal can read the article at the following link. 

http://www.thehedgefundjournal.com/node/8321 - Note: New users can take a free 30-Day trial subscription out if they wish prior to committing.

A transcript of the full article is available below:
_________________________________________________________________________________

Coaching and Continual Improvement

Challenging the behavioural aspects of trading performance

“It is not the markets we conquer, but ‘ourselves’.” Financial Markets firms are increasingly looking at ways to enhance individual trader and portfolio manager performance as a step towards improving returns. This quote paraphrases a famous Sir Edmund Hillary quote. The original quote, ‘It is not the mountain we conquer, but ourselves’, has been used extensively to highlight the human nature of performance, that once one has the skills, the tools, and the knowledge, then it comes down to the biggest obstacle of all, the person, or more specifically, their mindset, attitudes, beliefs and behaviours.

Working on people and the behavioural aspects of performance is one of the new frontiers opening itself increasingly to the world of trading. A growing number of financial market businesses are looking at ways they can support their people to improve profitability and increase returns. There are a number of catalysts behind this, including, the continued emergence of the ‘Behavioural Finance’ movement, championed by the works of Nobel Prize-winner Daniel Kahneman, and luminaries such as Richard Thaler and Robert Schiller. The emergence of Behavioural Finance has led to a growing appreciation of the limitations of human rationality and the role that emotions play in effective decision-making in financial markets. Another major catalyst is the increased pressure for results in the challenging post-global financial crisis environment; much of the fat has disappeared from the market, and decent returns have become considerably harder to achieve. Further to this is increasing recognition of new avenues available to businesses to help them support their staff to enhance personal trading performance; in particular this includes the positive effect of coaching on individual performance together with cultivation of a culture aimed at ‘continual improvement’.
Until now the world of trading has been slow to embrace the concepts of coaching, and ‘continual improvement’; whilst there are some notable exceptions, these are few and far between. This contrasts with many other areas of business and performance: senior management in most large corporations make use of ‘executive coaches’, whilst ‘sales coaches’ are used comprehensively to help improve performance within many sales teams. Medicine, and in particular surgery, use coaching to improve technique and effectiveness. The teaching professions and the military use coaching as a way of improving performance over and above traditional training processes. Also most high-performance activities, including virtually all sports, plus music, theatre and dance, use coaching extensively: in fact the higher up the ladder of achievement in these fields the more crucial coaching becomes.

What exactly is coaching? How does it help?
Coaching is a forward-looking, powerful, yet flexible approach which aims to help facilitate people to progress towards higher levels of performance. The coach acts as an impartial observer whose objective is their client’s success. The coach plays the role of a sounding board for their client as they seek to prosper in the markets and respond to the challenges they face. Working with their client in a collaborative way, the coach listens, reflects and sometimes challenges the client, aiming all the time to help them realise their potential, and reduce the interference factors which undermine their performance. The coach does not engage in teaching or training; they view the trader or portfolio manager as an expert in their field, akin to how a professional tennis coach does not teach or train the player, but rather works with them outside of competitive matches, to improve their performance within competitive matches.

Why has the trading industry been slow to adopt coaching?
There would seem to be a number of reasons for this; amongst these is a belief that once a trader possesses the skills and knowledge, then performance should be permanent. This is of course an ideal, but performance is rarely permanent; individuals change, the nature of the markets change, the environment changes and the challenges facing individuals are in a constant state of flux. A further reason is a misconception about what exactly coaching is, together with a reluctance to be seen needing outside assistance: many people in the market seem to confuse coaching with either teaching or training on the one hand or psychiatry or counselling on the other. This confusion is exacerbated by the number of people who incorrectly call themselves coaches but really fall into at least one of the former categories. Adding to these general misconceptions is a reluctance by some traders to be seen needing help, for fear of being seen as weak in the minds of colleagues or peers. Yet those who do use coaching know that it is a source of strength rather than a weakness. Certainly the businesses we work with apply coaching to individuals who they see as having potential, people who they want to invest time, money and effort in.

What exactly is ‘continual improvement’?
‘Continual improvement’ is really a philosophy or approach to the job or the business. Developing a culture of ‘continual improvement’ is a step on the road to enhanced and more robust decision-making, reducing imperfections, biases and analytical errors which all people are prone to. As a consequence people and businesses are better able to profit from opportunity and more able to withstand the inevitable setbacks that working within uncertain environments entail. Although many firms talk of practicing this sort of ethos, most tend to pay little more than ‘lip-service’ to the idea. Goldman Sachs and Bridgewater Associates, two of the most respected firms in the investment industry, are notable exceptions: Goldman’s has an extensive set of business principles which it adheres to, and the business has a flat organisational structure with few hierarchies. This makes Goldman's open to ideas from people at all levels, with managers encouraged to constantly provide constructive feedback that allows for continuous improvement. Bridgewater Associates, the world’s largest hedge fund, has a similar ethos instilled in them by founder Ray Dalio. In an interview with Jack Schwager last year for his book, Hedge Fund Market Wizards, Dalio stated a number of his management rules which form part of the culture at Bridgewater. These include: ‘Recognising that mistakes are good if they result in learning,’ and the ‘Creation of a culture in which it is okay to fail, but unacceptable not to identify, analyse, and learn from mistakes’. At Bridgewater, criticism and feedback are sought; it is not uncommon to find junior members of the organisation openly questioning decisions taken at senior level.

As financial and investment businesses adjust to the post-global financial crisis world, increasingly they seek ways to be more effective and productive. An example of this from our client portfolio involves a major hedge fund client who has recently adopted ‘coaching’ and a ‘continual improvement’ ethos. This client has been rewarded by seeing an improvement in performance of individuals being coached, and in an improved retention rate of new portfolio manager hires. Embracing ‘coaching’ and the ‘continual improvement’ ethos, are signs of progressive, forward-looking businesses, who are coming to realise that the success of their people is also their success.

Steven Goldstein is a qualified executive coach and trader performance coach who has worked with traders and portfolio managers at some of the world’s leading hedge funds and investment banks. Goldstein brings a unique perspective to his work having been a trader for 25 years at a number of major investment banks in the FX and fixed income markets. sgoldstein@bgtedge.com

"A Man Show His Success" image courtesy of Pakorn at FreeDigitalPhotos.net.
"Improvement Concept Ideas" image courtesy of Kromkrathog at FreeDigitalPhotos.net. 
"Businessman Pressing Risk Button" image courtesy of mack2happy at FreeDigitalPhotos.net


 

The Pros and Cons of Financial Market Bloggers plus my Favourite Blogs.

Every trader seems to have a favourite market blog or blogger these days. Over the last few years a number of them have become quite influential in their own right, with some almost becoming essential reading and at times 'de-rigour' during many of the various episodes or crises affecting markets in recent years. 

Market Bloggers provide very valuable services and all at no cost to the reader. However it is important to keep a perspective on Blogs, they are not news websites, nor analytical services or edited journalistic publications. Many traders can benefit from blogs, but knowing how to use blogs and 'blog aggregating' services effectively can help improve one’s own decision-making in trading, and help traders avoid falling into any one of a number of potential 'trader-traps'. 

Below are a list of some of the beneficial aspects of blogs, and a further list of some of the pit-falls which can affect traders when using blogs. I have also provided a short list of some of my own favourite 'Financial Market' blogs and 'blog aggregators'.

The beneficial aspects of blogs.

• A useful source of news and information on markets, often with some additional perspective or angle added by the contributor, which can help provoke thought and add a new element to the reader’s knowledge of the market and the bigger macro-economic or political picture. 
• They provide access to or reproduce interesting articles and stories, which readers may have not had access to or been aware of. 
• They allow the reader access to information, thoughts and sentiments of leading players in the market, which can provide added input to the individual trader who does not have access to these sources of information. 
• They both inform and educate at the same time, and can at times be entertaining. Not all blogs are about markets; some can be educational or provide information for learning on certain topics or themes.
• They provide a kind of surrogate community for traders: Trading can be a lonely existence, particularly for the many lone traders working from home. Blogs can create some sort of community feel or forum for debate, even without actually participation of the reader.

Some negative aspects to following bloggers too closely or relying to heavily on them in the decision-making process.

• Blog commentary, though presented as unbiased and true dissemination of facts, are nonetheless opinions which often heavily reflect the writers own biases and beliefs and have 'usually' not been through any formal editorial process. 
• People have a tendency to believe what they read, particularly when backed-up with selective facts or statistics; this is how conspiracy theories spread. The financial market biosphere is fertile ground for these, particularly as the reader usually has financial loss or gain wrapped up into the bargain.
• Anonymous blogs: Anonymity may not be a bad thing in itself; it can help publication of thoughts, perspectives and stories, which identification of the writer or source may have held back publication. However this is a double-edge sword, anonymity can add a veneer of credibility to something or someone who is without credit. - 'Reader Beware!' should always be at the back of your mind, where blogs are anonymous. 
• Many bloggers do not have 'skin' in the market: Rather like the other point, there is good and bad to this: Someone without 'skin' in the market may be a very good analyst, and not being affected by the emotional baggage that comes with trading may lead them to have a clearer perspective. However, many are presenting themselves as credible individuals and the 'blog-reader'/trader can easily become influenced and identify with people who may not be who they present themselves as. In many cases the blogger is relying on promoting them-self (or their product or service), they may not suffer the pain the trader who takes their advice does.  
• Sensationalism is common. Creating a sensational headline or claim, is one way to increase readership and ensure the articles are forwarded or picked by aggregating sites. This is often, though not always, the preserve of the anonymous or egotistical blogger. - The dangers here are that their story or headline is open to misinterpretation, could be exaggerated or short of the full facts. The danger to the trader is that the story or headline may raise the blood pressure and create negative feelings in their mind, just at the wrong time. Again - keep 'Reader Beware!' firmly at the back of the mind.
• Traders can easily become too heavily influenced by blogs to the point that their own decision-making on markets is usurped at times. Use blogs as supplementary information when making decisions, 'Never' as a primary decision-making tool.
• Confirmation bias; a tendency for people to favour information that confirms or supports their beliefs or theories. The risk form this is actually re-enforcing a negative view or a bias and ignoring crucial information which opposes a beliefs or theory, to the trader’s detriment. Try to ensure you have a balance of blogs opinions and seek out some who have contra or opposing opinions. - Whilst, you do not want to undermine your perspectives on markets you also want to ensure robustness; seeking out opposing views can help you become more aware of other aspects you may have overlooked. 
•  Blog or analysis overload. - What is happening in front of you on the screen in the markets is paramount. - However too often people can be caught up in the world of blogs. This can cause them to subjugate so much else they should be doing for blog-reading and searching for trade ideas (other peoples ideas). This can also cause them to miss crucial market activity, partly by distracting them, partly by blinding them and also by adding a layer of confusion and obfuscating clarity. - Traders should aim to restrict the amount of time spent reading blogs, restrict he number of blogs one reads, and vary your reading. I always try and request of my clients, 'Do your own homework; be thorough, think first and think independently rather than let other people shape your thinking too much'. 

Having said all that: - I would like to provide a small list of my favourite blogs or blog aggregators. The list includes a wide range of themes, markets, analysis methods, approaches and perspectives. Some relate to markets currents, some are particular to a field of topic. Some are very well know, some lesser, and some to just a few (Currently).

• RMDfx - Excellent commentary and opinion from a very wise trader (who does have skin in it): http://www.rmdfx.com/
• The Mercenary Trader - An excellent and thought provoking and sometimes educational blog : http://www.mercenarytrader.com/
• A Dash of Insight - One of my favourite over the years, consistent not sensational, good rational explanations around markets: http://oldprof.typepad.com/
• The Trend - The thoughts of a trader on markets, he describes the status of his trading system and what it means for markets, mostly US equity and FX: http://trendythird.blogspot.co.uk/
• The Big Picture - A staple of the financial market blogosphere for years, Barry Ritholtz is often forthcoming in his opinion, and also carries many other exceptional articles: http://www.ritholtz.com/blog/
• Pragmatic Capitalism - Good commentary on markets from a macro and micro perspective. I'm not always in agreements with his views, but that does not make him necessarily wrong though: http://pragcap.com/
• The Psy-Fi blog - One for those with an interest in behavioural finance. A brilliant blog always interesting, IMHO : http://www.psyfitec.com/
• A Trader Journal - Excellent blog by a trader and member of my linkedin group, whereby he shares his thoughts related to trading and market analysis. : http://www.atraderjournal.com/
• Seeking Alpha: Seeking Alpha is a blog aggregator, has many excellent articles and blog entries: . http://seekingalpha.com/
• Mish's Global Economic Trend Analysis: Mike Shedlock provides some well thought out perspectives on markets and investing: http://globaleconomicanalysis.blogspot.co.uk/
• Matt Trivisonno's Blog: This is a blog I really like, I am not sure how widely read it is, its not a professional blog like some, not is it  always relevant, but it does have some occasional great stuff: http://www.trivisonno.com/
• Carl Futia: Carl produces daily technical calls on the S&P, nothing fussy, usually a range call. There is no ego attached, not how right or wrong he is, just plain and simple. Having watched his calls for many years, he is 'very' good most the time : http://carlfutia.blogspot.co.uk/

Feel free to add your own favourites in the comments section of this blog, or the on the linkedin group discussion this is attached to. Or to respond to on any aspect of my own thoughts and musing on financial blogs.

Image "Blog Definition Button" by Stuart Miles, image "Blog Post" by Renjith Krishnan, and image "Business Report" by Jeroen van Oostrom  courtesy of FreeDigitalPhotos.Net "http://www.freedigitalphotos.net".