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Should trading be boring?

Fusion Markets

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That’s a good question and is one that was posed by a man with many years of experience in the markets, Charley Ellis. Ellis, after a stint on Wall Street, founded Greenwich Associates in 1972 which grew into one of the world's most respected research houses. He said:

 

“Go to a continuous-process factory sometime — a chemical plant, a cookie manufacturer, a place that makes toothpaste. Everything is perfectly repetitive, automated, exactly in place. If you find anything interesting, you’ve found something wrong.

 

Investing is a continuous process, too; it isn’t supposed to be interesting. It’s a responsibility. If you go to the stock market because you want excitement, then sooner or later you will lose. Everyone who thinks the stock market is a game loses — everyone, to the last man, woman and child.

 

So, the purpose of an investment policy is simply to ensure that your continuous process never breaks down...

 

Benign neglect is the secret to long-term investing success. If you change your investment policy, you are likely to be wrong; if you change it with a sense of urgency, you’re guaranteed to be wrong.”

 

There is a lot of sense in those comments after all the key to successful trading is finding a system, trading style or approach that works for you, and does so consistently.

 

Developing or creating that approach gives you your edge, which is something that every trader needs if they are to succeed and grow their capital long term. Creating a viable trading strategy or trading edge is the exact opposite to the random and emotional trading that sees many new and aspiring traders come to grief early on their career.

 

When we read about great traders, we often wonder what makes them different to you and me and what it would take to follow in their footsteps. Let’s be honest we probably aren’t going to be the next George Soros, Ray Dalio or Jim Simons. However, what we can do is to emulate their systematic approach to the markets.

 

Systemising your trading is about creating a set of rules which describe your trading approach, the opportunities you look for, and the risk management ratios you apply.

 

Once you have written these down, you have effectively created your trading plan, and what’s more, you have laid the groundwork for creating an algorithmic strategy.

 

An algorithm or algo is just a set of rules that a computer can follow and execute. Of course, nearly all trading today is conducted electronically. Yet, as much as 70% of that business employs algorithms to improve trading efficiency, execution quality and anonymity. The latter can be beneficial in retaining your trading edge and not seeing it arbitraged away.

 

A report by Business Wire predicts that Algorithmic trading will experience a compounded annual growth rate or CAGR of 10% per anum between 2018-2026. Two years into that period, and there is no suggestion that the analysis is wrong.

 

Using a rules-based system to decide when you should buy and sell is the key to maximising your profitability. And perhaps just as importantly, minimising your losses. Leaving those decisions to our emotional selves is not a viable option for long term trading success.

 

As we have discussed before, our psyche contains biases, emotional responses and short cuts that are not suited to trading and they can actually hinder the process. It’s far better to use a systematic rules-based approach that can help us run winners and cut losses rather than the other way around.

 

To take your trading to the next level, you need to ask yourself a question, and that is...

Have you developed a system, or are you just having a punt?

Do you follow a set of trading rules and stick to them each time you trade? Think about your trade sizes, risk-reward ratios, the use and placement of stop losses. Consider the average profitability of your trades and how often and by how much do the results deviate from that average?

 

Much of this data will, of course, be available to your in trade history and statements that’s one of the great benefits of electronic trading. It should be possible to identify the products you trade well and the time of day (your peak). Not to mention those times you switch gears and try to trade something you’ve never done before. E.g. an FX Trader dabbling into commodities because it’s “hot”.

 

A very effective way to systemise your trading and improve its efficiency is not to trade in the instruments, and at the times of day that you do poorly on. And instead, focus on the most profitable areas of your trading. You will be amazed at just how much difference that simple change could make.

 

 

Finally, ask yourself, are you getting too excited about your trading and the individual positions that you take? Do you wake up in the middle of the night dreaming about your positions or checking them? If you are, then you are probably taking too much risk.

You see a trader should largely ambivalent about individual positions, because if he or she has systemised their process, then trades will be a bit like riding the tube in London, that is, another one will be along in a minute.

 

What will or should be of concern to them, however, is whether they are making the most out of every trade that comes by. Better to be focused on the process and the system and not the individual trade outcomes. Transitioning from one way of thinking and approach to the other will very much put on the right route for trading success.


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USD/BRL: An Overview
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The forex symbol USD/BRL indicates the exchange rate value between the USD (US dollar) and the BRL (Brazilian Real)

 




Currency background


USD (US dollar)

 

The USD dollar is the United States of America’s official currency. Each dollar is made up of 100 cents. It is represented by US$ when differentiating it from other countries’ dollar currencies. However, they are more often just marked as $.

 

This currency has become the benchmark for other currencies because it is the most popularly used one. Even territories beyond the US have commonly used it as an unofficial currency.

 

Because it is often at the core of foreign-exchange trades, it has its own index – the USDX. It is regarded as the world’s most stable currency.

 

Brazilian Real (BRL)

 

The Brazilian Real (BRL) is Brazil’s official currency. Each Brazilian real is made up of 100 centavos. It is represented by the R$ symbol.

 

It was first used as the country’s official currency in July 1994. It replaced the cruzeiro real. The exchange ratio between the former and the current currencies are not 1:1, either. 1 real is equals to 2,750 cruzeiro real.

 

From 1994 to 1999, BRL was pegged to the USD as an attempt to maintain stability. As the largest Latin American economy, it is worth looking into. It is also the 9th largest in the world.

 

If you’re considering taking the USD/BRL pair, here are the things to consider:

 

Economic Conditions

 

Currency values depend on the economic conditions and public reception of their country’s stability.

 

Since the mid-twentieth century, the USD dollar has established itself as a powerhouse in the global economy. However, because it is a fiat currency, it is also affected by the United States’ economic outlook and activity.

 

Its strength may be good for the country itself. It can also be good for those who may be relying on its general strength to earn in foreign exchanges.

 

However, a powerful USD can be detrimental to countries relying on exports from the United States.

 

While the USD is obviously strong throughout, much can be said about Brazil’s economy as well. It is believed to be one of the strongest emerging economies due to its rich natural resources.

 

Its diversity in economy has spurred foreign investment to pour in. With an estimated $200 billion of direct investments, Brazil’s currency is doing great.

 

It wasn’t always the case. The currency faced several currency crises such as the Mexican currency one from 1994 to 1995, and the one with Asia and Russia in 1997 and 1999. Investors then didn’t want to have anything to do with the Brazilian real.

 

Supply and Demand

 

When the US exports more products, it triggers more demand for its currency because customers must change their money to dollars to be able to pay for the goods.

 

The US government and top American corporations may also issue bonds that can be purchased only with the US Dollar. Foreign investors must buy dollars to buy those financial instruments.

 

Because of the overall reliability and strength of the US dollar, a lot of investors will still buy the currency as a reserve.

 

Perception

 

Currencies depend on perception or market sentiment. For example, if people have been watching the news, finding out about a weakened US economy or increased unemployment, the tendency is to buy back their local currency. This will lower the value of the dollar.

 

The same goes with the BRL, but even worse since it is a less popular currency. While its economy is doing well and has it placed up there among emerging markets, political corruption could be its downfall.

 

Geopolitical Conditions and Global Risks

 

One of the factors that affect perception is geopolitical conditions. How are the politics in the country?

 

USD is a dominant global reserve. It may experience some lows, but it is always generally high in value. Recent events have this fiat currency on the rise, too. On the other hand, Brazil also started strong this year and has been pulling from Russian assets.

 

What can provide some volatility in the USD/BRL pair is Lula’s recent election as the President of Brazil.

 

How to trade USD/BRL

 

Now that you know the strength of the individual currencies, how do you trade the USD/BRL pair?

 

The value you get will depend on the exchange rate between the two.

 

While USD is a stable currency, Brazilian real is the currency of an emerging market. It means that Brazil’s GDP has been steadily growing from 2000. A similar trend is expected to continue.

 

You will earn a profit because an emerging market’s GDP tends to grow rapidly. However, you must be vigilant because it is also at risk of being negatively impacted by political instability and currency fluctuations. Weigh risks against rewards.

 

Pick the right time frame

 

Trade when the USD/BRL is at its busiest, and potentially at its most volatile. The 8:00 to 12:00 Eastern Time frame is also the time when USD details are more readily available.

 

It is when significant chunks of data have been released that a currency pair’s volatility increases. Be watchful at this time because you will have increased opportunities for profitable trades.

 

Conclusion

 

USD/BRL is useful if you want to diversify your foreign exchange portfolio. Your portfolio may see increased gains/losses when one of the fiat currencies in your portfolio is an emerging one.

 

Why?

 

Emerging currencies are more likely to display greater volatility. They have also been steadily rising since 2000. Though the previous formation is not a guarantee of future performance, the current strength of currencies like the Brazilian Real is reassuring.

 

Of course, you will be dealing with two currencies that can give you a lot of value. The USD is always strong. Meanwhile, BRL performs well because of the resources and commodities that Brazil can export. Exports can strengthen both currencies because they prompt investors to buy them.


Currency Trading
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USD
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17.11.2022
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