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Hi RTs,
Last year, I traded fundamentally for a few months and then traded
technically for the next few months. The result: my fundamental
performance was good and my technical performance was disastrous. My
technical method was a modified breakout rule and it caught all those
false breakouts and it burned my capital away slowly but surely.
My fundamental analysis is limited to economic theory. The following is
my experience from actual trading.
My first serious attempt to develop an economic model came in late
1997. In 1997, Asian currencies collapsed. And their economic
situation changed very suddenly. We have seen in the past how these
sudden economic shocks could occur (USA 1929, Brazil & Latin America
early 1980's, Japan 1990, Mexico 1994, etc.), but this time I have
enough time and materials to do a study. So, after a few months'
intense study, I developed my "Far-from-equilibrium Macro Economics
Theory" (FFEE) in May 1998. Certainly, I would use it in trading.
I opened a futures account in July 1998. The first fundamental trade
from FFEE was shorting Canadian Dollar. It worked. Then, I went long
Eurodollar, US T-Bond and Japanese Yen. I also went short Dow Jones
Futures on Sept. 29, 1998. Amazingly, they all worked, just as my FFEE
predicted. I made money in Canadian Dollar, Eurodollar, Japanese Yen
and Dow Jones. Unfortunately, I stayed in US T-Bond for too long and
there was a reversal on Oct. 8 and Oct. 9, 1998. I have protective
stops, but I was filled 32 ticks below my stops. Fortunately, I took my
profit in Dow Jones Futures on Oct. 9, 1998 and it was a good decision.
The speed that market took my profit away was remarkable, especially in
US T-Bond. That left a deep impression. The collapse in US T-Bond on
Oct. 8 & Oct. 9 was a resonance (gamma trend). And it was AGAINST me.
The feeling of being caught in this type of situation was very negative,
although this should be no surprise.
Since US stock market held up very well on Oct. 7 & Oct. 8, I suspected
that an interest rate cut from the Fed was on the way. I decided that
the next big move was going to be in Swiss Franc and D.Mark futures
market. The only question, of course, is whether this expected big move
would be up OR down. I had to make a decision.
My FFEE suggested that Swiss Franc and D.Mark would depreciate against
US Dollar. An interest rate cut will boost US stock market and capital
would flow from Europe to USA, hence US Dollar should go up. However,
my 4 year study in University and my Economics Degree suggest another
scenario. Since I expected that the US would cut interest rate soon and
Europe was going to keep its rates unchanged, academic economics theory
points to an appreciation of Swiss Franc & D.Mark against US Dollar due
to interest rate differencial. At that time (Oct. 9, 1998), US Dollar
was very weak. I thought about it. My FFEE was right 5 times in a
row. But I was not confident. Academic economics theory must be
correct millions of time. If not, it would not be published in the
textbook, I thought. Then, my intuition came in and I believed that
after a series of violent swings in the over-valued US stock market, the
expected capital inflow might not occur. I decided to go long Swiss
Franc & D.Mark futures.
I lost money in both trades. When the Fed cut interest rate, Swiss
Franc and D.Mark futures went up and I bought more. That was the only
"up" day and then Swiss Franc & D.Mark futures were sinking fast. My
economic knowledge from academic economics was wrong and my FFEE was
right.
After that, I still had substantial profit from my Jap.Yen trade. I
caught the whole move in early Oct. 1998. I decided to use the money to
trade technically. I had a modified breakout system that was designed
to avoid intra-day breakouts. I used it because the system went short
sugar in Aug. & Sept. 1998 and it also made several other profitable
trades. However, later on, there were so many false breakouts which
were not intra-day in nature. So, I lost consistantly by catching false
breakouts.
I have suspended trading for a while due to my faulty technical system.
In early March, my fundamental economic theory FFEE again gave me a
scenario. After G7 meeting, I was convinced that the US had given a lot
of pressure on Europe (cut interest rates) and Japan (increase money
supply). According to FFEE, these actions would drive capital out of
Europe and Japan. A capital flow into USA would occur and there would
be further boom in US stock market. So far, this scenario is correct.
All the best!
Mervin
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