(1) The key to long-term survival and prosperity has a lot to do with the money management techniques incorporated into your technical system. There are old traders and there are bold traders, but there are very few old bold traders.
(2) All trading has some kind of system. Most good systems following trends. Life itself is based on trends. Birds start south for the winter and keep on going.
(3) Fundamentals you read about are typically useless as the market has already discounted the price, and I call them "funny-mentals"
(4) What's important to me in any trade are (a) the long term trend; (b) the chart pattern; and (c) picking the right buy and sell. A distant fourth are fundamentals.
(5) I don't try and pick tops and bottoms
(6) Pride is a great banana peel... as are fear, hope and greed. My biggest slip-ups occurred shortly after I got emotionally involved with positions.
(7) The three elements of good trading are (1) cutting losses; (2) cutting losses; and (3) cutting losses. If you follow these three rules... you "may" have a chance.
(8) I handle losing streaks by trading smaller.
(9) I set protective stops as soon as I enter a trade. I normally move these stops to lock in profit as the trend continues. Losing a (profitable) position is aggravating, whereas losing your nerve is devastating
(10) My maximum equity at risk on any one trade is 5%
(11) My success comes from my love of markets. I am not a casual trader. It is my life. I have a passion for trading. It is not merely a hobby or a even a career choice. There is no question that this is what I am supposed to do in life.
(12) The trading rules I live by are (a) cut losses; (b) ride winners; (c) keep bets small; (d) follow the rules without question; and (e) know when to break rules
With respect to (e) - systems and method are constantly being refined. A rule is changed when it no longer works
(13) I ignore advice from other traders
(14) Having a quote screen is like having a slot machine on your desk - you end up feeding it all day. I get my price data after the close each day. That's it (note: Ed only used one computer - not a dizzying array of screens we see today)
(15) A losing trader can do little to transform himself into a winning trader. A losing trader is not going to want to transform himself. That's the kind of thing winners do. Winning traders have usually been winning at whatever field they are in for years.
(16) A good trader (a) loves to trade; and (b) loves to win
(17) I don't judge success. I celebrate it. I think success has to do with funding and following one's calling regardless of financial gain.
The government and RBI have taken several measures to check the
depreciation of the rupee. Both have made several references to the
non-deliverable forward (NDF) markets as a source of speculative
activity against the rupee.
NDFs are derivative contracts that do not require the delivery of
the underlying asset. NDF markets exist for most emerging market
currencies that are not freely convertible on the capital account. They
allow market participants across the global to speculate freely, while
remaining outside the purview of the regulatory structure of the country
A thriving NDF market exists for the rupee in Hong Kong, London,
New York and Singapore. According to estimates by an NDF market maker,
these markets trade about $5-7 billion daily. The onshore markets,
derivatives and spot, used to trade approximately $4-6 billion.
After RBI’s recent measures to curb speculation, the onshore
volumes for the rupee have declined by about 50% to $2-3 billion.
Effectively, the NDF markets are now responsible for about 60-70% of
daily rupee trading from about 40-50% earlier. According to data from a
December 2011 report by HSBC on emerging market currencies, the NDF
markets had a share of only 20% in rupee trading. Clearly, offshore
rupee volumes are on a rising trend.
This is a pain point for RBI. RBI has a myriad of regulations on
the convertibility and trading of the rupee in India. As the entities
offering NDF products are offshore, RBI’s regulations and Indian laws
such as the Foreign Exchange Management Act (FEMA) do not apply.
Usually, the NDF forward prices trade 20-30 pips higher than
onshore futures on the NSE. Further, the derivatives on the NSE trade at
a premium to the interbank spot rates. The extent of this difference is
determined by interest rate differentials and market liquidity
conditions. This difference offers an arbitrage opportunity to entities
that can trade both the markets.
Multinationals, foreign banks, custodians, some domestic banks,
large export houses, etc, which have presence both onshore and offshore,
are able to arbitrage this difference by selling the NDF and buying the
futures on the NSE or, in some cases, buying the spot itself. This
regulatory arbitrage trade is preferably executed using derivatives as
the cash outlay is lower and leverage can be used to enhance the
returns. While there exist RBI regulations to deter this sort of
regulatory arbitrage by offshore subsidiaries of Indian companies, these
regulations are difficult to implement in practice due to limited scope
of scrutiny of offshore companies by RBI.
Instead, RBI has tried to crack down on this trading by sharply
curbing domestic trading. The drastic reduction in permissible open
interest on exchange traded derivatives has reduced the capacity of
market participants to speculate on the rupee. It also limits the extent
to which the NDF arbitrage can be carried out using the derivatives on
the NSE since the domestic leg of the transaction cannot be carried out
in large volumes.
Additionally, RBI raised the average daily CRR requirements,
capped the liquidity under the Liquidity Adjustment Facility (LAF) and
raised the spread between the Margin Standing Facility (MSF) rate and
the repo rate from 100 bps to 300 bps, bringing the effective rate to
10.25%. Since RBI announced these measures, overnight call rates rose
from 6-7% to about 10%, approximately the same as the MSF. Higher
interest rates raise the opportunity cost of holding dollars instead of
rupees. The monetary tightening created forced sellers of some domestic
banks whose treasuries sold dollars to raise rupee liquidity which is
now substantially more expensive and needed to fulfil stringent CRR
requirements. These measures caused the rupee to appreciate by 2-3% for a
short while before resuming its move down.
The monetary tightening that resulted in temporary support to the
rupee will prove very costly to the Indian economy. Overnight interest
rates are higher by 400 bps, there is a severe liquidity crunch in the
money markets, and the stock markets have fallen about 8%, with bank
stocks correcting between 20-40%. This creates a very inhospitable
investment climate in India.
The reduced volume in the onshore market threatens to make the
rupee more, not less, volatile. Further, these restrictions may move
more rupee trading volumes offshore as market participants prefer that
the rules of the marketplace are not changed to hurt them. This will
move an ever larger fraction of the market outside of RBI’s
jurisdiction, threatening to make the transmission of policy measures
There are strong reasons why the rupee is not stabilising.
India’s poor governance, declining growth, high current account deficit,
and high fiscal deficit have made the rupee the currency of choice to
bet against in the emerging markets basket. Additionally, the threat of
reduction of quantitative easing in the US has put all emerging market
currencies and bonds under stress. RBI’s own poor communication skills
add to the problem. Statements about them being “concerned with exchange
rate volatility, not rupee level” invite bets against the rupee as the
implication is that the central bank does not care if the rupee goes to
61, 64 or 67!
If the rupee is to be stabilised, RBI needs to communicate less
often, and more effectively. Policy measures should be followed up with
strong interventions in the FX markets. The central bank and the finance
ministry should keep their disagreements private. The government is
naive to expect the investment sentiment to improve in the face of
slowing growth, looming elections, unimplemented liberalisation,
inaction on industrial revival, and unbridled populism exemplified by
the Food Security Bill.
The NDF markets are outside RBI’s jurisdiction, and no manner of
domestic restriction will diminish their existence. Markets are
messengers of underlying problems, not the cause. If drastic measures
are on the table, why not temporarily ban gold imports instead of
murdering the economy? Pakistan just did. Probably a ban on gold will
damage perceptions more for the ‘aam aadmi’ and some mumbo-jumbo in the
credit and currency markets.
The author is managing director, Bullero Capital, a Sebi-registered portfolio manager