"Trading strategies" by Adrian Raymond

"Trading strategies" by Adrian Raymond


Adrian Raymond - a currency analyst with a solid experience in Forex markets. With an academic background in economics and financial markets, he focuses primarily on macroeconomic developments that drive currency and metals markets. Adrian spoke to Maria Goncharova of EXANTE and introduced his trading strategies and the way he uses technical analysis for executing them.

Adrian, please tell us how you entered financial markets and may be why did you choose to become a market strategist?

I am a market strategist for DailyFX. I am actually in the Paris office and I write in the French version of DailyFX. To answer your question why market strategist and not a trader, it probably comes down to the question of learning and experience. When I started it was 2011, fresh out of college, I just got my bachelor's degree and I started with FX as an intern. I had previous experiences in financial markets, especially in stock markets in United States, but nothing extremely serious in terms of trading. I wanted to learn a lot about how markets work, to follow markets on a day-to-day basis, to analyze all the noize in the markets, to understand what is the most important thing that make markets move, whether it is stocks, currencies, bonds, how can we anticipate market moves not only on the short term basis but also on a long-term basis. After my internship I stayed at DailyFX because eventually my role in a company evolved. Right now I am in transition period where I have a trading plan that I’m going to implement later this year - a decision to make a move from that learning stage, like telling people what you think about the markets, to actually trading and to put the money where your mouth is.

How do you choose instruments for the portfolios you analyze? What aspects do you take into account? And what is your opinion regarding exotic instruments and pairs?

In terms of products people can trade me as an analyst for forex broker I have a lot of exposure to clients, retail traders, who don’t necessarily understand all the technical aspects of these assets, like where is the underlying market coming from with these derivatives like CFD’s or how do financing costs work. The thing that is most important for any trader is to understand what are the costs inherent in any product, whether it is a spot forex or cfd and any other derivatives. The other thing is the access to leverage through certain products, especially those in Europe there are a lot of products that offer a lot of leverage today through trackers and warrants. The product itself that you trade or invest in has to be in line with your trading objectives. I’m pretty much limited in terms of the assets I follow. I’ve figured out what markets I understand the most on fundamental basis and what are the markets that I don’t understand and I just probably never will. I understand really well currencies, especially on the major currencies, as the forex market is the one I am focused on since a long time. I focus on the fundamentals in the Eurozone, in the Unites States. I don’t think I will ever understand trading stock indices on intraday basis or scalping. I just know that I don’t have what it takes to do that because than I look at all markets together I always focus on first and foremost - the fundamentals. As you reduce the time frame in any chart, currency, stocks or indexes, those fundamentals don’t matter so much anymore, there’s a lot of white noise in the markets. As for the last questions about the exotic products and pairs, there is definitely a place for exotic currency pairs in trading portfolio. It is not every day that you will be looking at Turkish Lira or Russian Rouble. Those markets are a lot more risky, as they are less liquid and obviously the spreads are higher. People tend to not understand everything involved in the fundamentals behind, like Turkish politics that sometimes really drives the Turkish lira. I think there is a place for exotics pairs in the trading portfolio. They are really overlooked by a lot of retail traders especially because of the things such as a spread or necessary margin required to entry the position. There is a lot of opportunities that I have seen in the past 3 years on these currency pairs that tend to be a lot more volatile. Sometimes you have really nice trends on the South African rand for instance. You don’t look at exotic pairs every single day. You may look at them once a month, once every 2 months just to see if there are some opportunities.

You did mention that you look a lot at fundamentals. It is very interesting for us to hear what is your fundamental analysis like and what is your balance between technical and fundamental analysis? How essential is it to keep the right balance?

I use fundamental analysis to anticipate general direction of any market. A lot of people think that they can anticipate such trends and move with technical analysis and of course there are definitely some useful tools like Elliott Wave Theory or basic trend channels. However, I tend to believe that first you need to go through fundamentals, you have to look at what Central Bank is doing and what Central Bank is likely to do based on all those economic indicators that we tend to follow every single day and week. Every indicator is linked to economic growth, like what the central bankers are saying about the currencies, about inflation, about housing prices. I always start with fundamentals and I always tried to find the most obvious cases or argument for central bank move. For example, central bank that is likely to lower its interest rates. Those are things that can help traders. Once I have an idea or market vision i.e. whether the EUR is going to fall more over the long term, whether the JPY is going to start rebounding with risk aversion. Then I look at charts and try to establish through technical analysis reversal points and support and resistance. Then I try to find whether or not technical analysis backs my fundamental argument. Sometimes it does, sometimes it doesn’t. Basically, I use fundamental analysis to establish my strategies but the actual execution of the strategies that is based on technical analysis. I don’t think that we can necessarily expect you to make profits only on technical analysis, some people do but a lot of people don’t. At the same time, I don’t think you can make money on the markets only trading through fundamentals, because the timing is often not right and you have to wait for that timing. So technical analysis is really useful to find the timing and I try to find that correct timing with the fundamentals to back that up.

You have also mentioned the Relative Strength Index (RSI) before, could you go in more details about that one and tell how to use it?

When I use technical analysis, I basically stick with horizontal support and resistance levels. I have always understood best the RSI. There is a lot of other indicators that show just about the same thing, like whether the market is overbought or oversold. I only look at RSI to detect divergences. Let’s take as an example EUR/JPY chart for the last several years.

Here we can see that the market was rising quite sharply, we have got the period when the market consolidates and then it bounces up to reach new highs. When you hit new highs you think that Bank of Japan is buying up assets and also actually European Central Bank as well. Some people may think the JPY will go to 150 or 155 or even 160 cause the JPY is just falling like a rock. I look at RSI to determine whether or not that is the case. And this is the usefulness of divergences. Clearly when you have market that hits fresh highs whereas the RSI, and this is the case for many indicators, is not hitting the fresh highs, there is a reason to be concerned. When the market starts falling and that is the case happened in January, that’s when you have clearly the false breakout with the market reversal and that creates a really nice opportunity in such currency pair.

This is a negative divergence. We also have positive divergences for example if we take French CAC 40 Index, so back in 2011 there was a decent weekly divergence in the stock index where the market took a really big hit. The RSI felt below 30, that’s the oversold area. The the market kind of bounced a little bit and it came down to hit fresh lows and that is where we saw the low of 2011, and the stabilization of the market and then the eventual reversal. Those are things that are really useful to better anticipate the end of the trend or at least the moment where you shouldn’t be shorting.

So RSI divergences are definitely useful. That’s something that I definitely look for on a daily basis to see if there are any opportunities as they allow for the best risk-rewards in the market.

Thank you Adrian! I would like to ask you about current Greek situation. If you could give us your expertise opinion about it and maybe tell us what are the major things you anticipate to happen?

It is definitely a delicate subject especially for those who are in the Euro-zone right now. The problem with Greece today that there is not a lot of solutions that we can find today to solve the situation. Someone is going to foot the bill for Greece, whether it be the Greek people, whether it be the international creditors which we have already started seeing, especially Member States of European Union, mostly Germany and France. Someone’s have to foot the bill; nobody wants the budge right now- that’s a problem. There are only short-term solutions for long-term problems. The Greek government clearly has a mandate to refuse any further austerity. Germans and European community want to see more reforms to insure better future for Greece in the Eurozone. German taxpayers and all European taxpayers don’t really want to foot the bill for Greece. We have a really high level of moral hazard. We need to understand, do we really want Greece in the Eurozone. If so, well I think there have to be more reforms in a long-term, more austerity. As for the European Central Bank, I’m really waiting what ECB will do with its Emergency Liquidity Assistance (ELA) program. What is going to happen is that ECB help out the Greek banking sector or not. The problem is that Greek banks today are having a hard time obviously with capital controls. They are having a hard time meeting those obligations when depositors taking money out of the bank. It really causes a problem because there is no other solution. Greek banks depend 100% on the ECB today and ECB is so far not willing to increase that support, because clearly it can’t maintain ELA for banks that depend on that liquidity. Greeks banks can’t depend on the ELA forever. These are just long-term problems with the short-term solutions. The only solution that I see is to avoid end up avoiding a new market crash.  The only thing that I see this week or in the next couple of weeks - to avoid that kind of loss of confidence in the markets is if the European community agrees to allow Greece to solicit new funds from European Stability Mechanism (ESM). That’s probably the key solution that will allow Greece to pay off its debts. This is the only solution I see that could possibly allow stock markets to stop falling and rebound.

How the Greece debt crisis affects EUR/USD?

Speaking about EUR/USD, when I look at it I see that we have a lot of uncertainty in the markets, prices are falling, it seems reasonable because we are talking about Greece and there is a lot of fear in the market. When I look at EUR/USD I try to look beyond this Greek situation, which won’t disappear, in the next days or next week. I look at EUR/USD on a long-term and there is a downtrend. It would be too easy to say: “Well we can just short EUR/USD because the trend is down and prices are obviously going to hit lower”. That is too simple, but I prefer to stay on that side, on the short side of EUR/USD and not necessarily anticipate some kind of reversal. I look on the long-term chart with a log scale and I draw a resistance level that says: “ EUR/USD remains bearish over the long-term.”

The fact that prices have started falling, hitting new lows suggest that prices may keep falling. There is a lot of volatility in the short term. Everyone can see that EUR/USD in the downtrend now and we can short it and expect it to fall from 108 to 105 - as I have already said, that would be too easy, however that is what I expect on a fundamental basis and up till now the technical suggest the same thing.

You have just to be careful with the risk of volatility in the market. When we look at what’s happening right now, the volatility is actually pretty subdued. Apart from the gaps we have seen recently there is not a lot of volatility in EUR/USD in the past couple of weeks given all the uncertainties and all the news flow that we’ve had. I don’t know what that suggests as up until 2 weeks ago EUR/USD was still holding quite firmly and it was rather bizarre why it was so given problems with Greece and given the hang up in the negotiations. That was definitely markets thinking that at the last minute Greece was going to have their bailout package and that everything is going to be like back in 2011-2012. Well, markets actually got that one wrong and I think now we are realizing that things are a lot more drastic than they thought they were. There is a lot of noise; you have to look beyond what certain Eurozone officials are saying. The most important thing here is ECB, if it is going to support banking system? If ECB doesn’t, we are probably talking about a Greek bank failure. ECB leads national banks become insolvent.

Thank you so much Adrian, I think that answers my question perfectly! I know that our readers I eager to hear suggestions on the study materials. Please share with us the name of your favourite books.

In terms of books, I think that is John J Murphy’s “Technical Analysis of The Financial Markets”and Steve Nison’s “ Japanese Candlestick Charting Techniques” those are 2 classics that give you an idea of what to do in the market and I think you have to start with those books to learn technical analysis. In terms of the fundamental analysis, I don’t necessarily have a particular book to suggest, there is one by Frederic Mishkin on money and banking system that could be really useful for trader to understand how markets really work. Anything that touches on the basics of economics, interest rates is a good resource.

Can you please wrap up with some main suggestions that you would like to leave our readers with?

Sure, main suggestion for every trader: The most important thing in trading isn’t technical analysis, it isn’t fundamental analysis - the only thing that really counts at the end of the day is how you manage your trading account, money management. The fact that a lot of traders, especially retail traders aren’t profitable. That isn’t linked to technical analysis or being bad at your understanding of how markets are moving. It is actually linked to money management and psychology. The only way to manage both those is to be very careful with leverage. Leverage is the one thing that can make good trader be a horrible one. So I suggest limiting leverage you take as this is the thing that unfortunately “kills” a lot of traders in the long run.  

Source: webinar conducted by EXANTE and TradingView on 7 July 2015. 

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