TRADERTALK
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few other participants in these time horizons because very short-term traders are often high-frequency trading in the sub-minute or even sub-second periods. Most trend traders are trading medium-term trends of 30+ days; traditional short-term trend traders are usually participating in trends that are five days and longer. So we don’t have a lot of competition in our time horizons.
Te best thing about our trading style is we create great portfolio diversification for institutional investors. We have the most opportunity when markets are volatile – conversely these are often the worst times for equities and many fixed income strategies. When volatility is low in currency markets, as it has been recently, it is often the best investment environment for equities and bonds. Witness, for example, the rally in world equity markets from late November to February. Te S&P 500 was up 18% in three months, whilst currency volatility dropped to four-year lows. Most short-term currency traders reported break even returns for this period, but when equity markets were falling last year our incubation trading accounts made solid gains. So we have the ability to preserve capital in good times for traditional asset classes and make outsized returns in more difficult market conditions.
What Risk Management frameworks have you developed and how do you apply them with respect to different strategies and trading models?
Everything we do begins and ends with risk management. Trades are sized based on a risk algorithm and every trade is initiated with an initial stop – the exact amount that we are prepared to lose on any single trade. Te stop may become dynamic and and convert to a trailing stop in order to further preserve capital and lock-in profit. If the portfolio begins to become overpopulated with positions another risk algorithm will start reducing the size of additional trades in order to constrain further risk exposure. Te entire portfolio management process is constructed around the size of drawdown that we expect to have. Trades are sized, stops are calculated, and the portfolio constraints are operated in this way.
We expect that a normal drawdown can be up to 5% in any one month and we have a risk-targeted tolerance to an approximate 10% peak-to-trough drawdown. We could easily further limit these risk factors – but we feel that they are of the appropriate size to allow us to fulfil our desired objective of an annualised net return of 15-25%. Generally we recover from drawdowns very quickly so we would not expect to languish in a drawdown for any material period.
188 | april 2012 e-FOREX
What currencies do you trade?
We electronically trade the spot cash market in the major currency pairs and their crosses. We don’t trade emerging markets due to their lack of consistent liquidity and the high trading costs rooted in the fact that they have wide bid/offer spreads. In the developed currency markets high frequency trading has helped to dramatically reduced bid/offer spreads – so we like HFT traders even if we don’t fit into that category! Te generic spot market is now almost completely electronic. One senior FX banker told me last week that they just do not want to have any voice execution any more as it slows down their STP settlement process, and so we find that voice trading of developed spot currency markets is increasingly anachronistic.
How much reliance do you place on the latest automated trading toolsets and execution algorithms to help you better manage risk, optimize trade execution pathways and meet your investment objectives?
We believe that we are on the cutting edge of automated FX price aggregation. We receive extremely good pricing from the major banks because our style of trading is attractive to bank counterparties as we are often adding liquidity to markets when it is needed. In our trading style, it is not unusual for us to be loss-making in the first few minutes after trade inception as we are often entering markets just
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