The power of compound interest!

Think in % not absolute.

A dear friend has started a blog http://mydailytwopercent.blogspot.com on a very simple principle – to earn 2% a day. Now it might sound simple to lots of traders, it requires a lot of discipline and hard work to achieve. Most macho traders tend to think in absolute terms. They want to earn $x per day. They think in terms of risk and reward in $x per trade. Whereas trading is a game of percentage and probability. Winning $1,000 on a $1,000,000 account is same as winning $10 on $10,000 but many traders might scoff at the returns of $10 and not consider worth their while. 2% return per day can turn $1,000 into nearly 78,000 by the end of year. Now that is power of compound interest. This is also the reason I report my HW trades in 2 lot basis instead of absolute position size.

I am looking forward to following my friend’s success with all my best wishes.


2010 – The year of Forex?

Will smiling US Dollar dominate most of 2010

UPDATE : 6th Aug 2010 - I was simply adjusting border on the picture and this post has come up on top. This is nearly 7 month old post and please read it accordingly.

USD appears to be smiling again. Dollar smile theory, as per Stephen Jen, predicts gains for the greenback during times when the U.S. economy is either in a deep slump or growing strongly, and underperformance for the dollar during times of moderate growth. Now I am not sure which part of the smile Dollar is moving now but I sense that a trend change is emerging for US Dollar against major pairs and 2010 can be the year the dollar shines again. 2010 could also be the year dominated by foreign exchange markets. The bonds markets are played by central banks and equity markets are not going anywhere.
USD had been a short play for most of 2009 but lately USD appears to have formed a bottom against all major currencies and made impressive first wave highs. Now the question is – is this due to year end covering into USD positions OR a major shift coming. Strangely enough, I do not see much fundamental reason other than massive short position in USD to back this strength in USD. But Oscar has always said that fundamentals always come out in the charts first and as the charts are today, USD is going up.
So how to setup trades for this scenario? I will be looking to buy breakouts from highs for USD (or low for other pair) with stops 3 – 4 Average True Range. I will also look to buy pullbacks in USD (or sell rallies for other pair) at key retracement levels with stops below lows (above high in case of other pair). I will update further on the trades as they develop.


Glass half full or half empty?

S&P 500

I believe S&P 500 is at some inflection point and I get two projections. 1350 and 850. Now that is most troublesome considering I was outright bearish for some time. It all depends upon how the breakout from current formation occurs. Many correlations appear to be breaking from recent past. For one, S&P 500 has shown tremendous strength even in the time of falling treasury yields – i.e. bonds and S&P have risen together. Also US dollar has started breaking down recently indicating a risk-on attitude amongst market participants. Commodities have taken off strongly lately indicating an inflationary expectation BUT the bonds markets are not pricing in that inflation. Something has to give and what would that be? If an upward breakout occurs, the impulse wave from March 2009 correction has high end projection of 1350 for S&P500. However if we are to believe that the corrective wave from March 2009 lows has completed at 1219 then the next stop for S&P 500 should be 850 or about before resuming next down leg eventually below March 2009 lows. I know this is a “no view” post but that is the position I am finding myself lately.



General Markets

July was an erratic month for me with below average and below median returns – not only because I was on holiday half the time but also because it felt that markets are in a choppy mode without any consistent clear trend. However this was 14th green month in a row for the homework book. Current median return is on assumed 2 contract lot basis is $2,033 and current mean return on assumed 2 contract lot basis is $4,724. Click here for HW Trades result on 2 contract lot basis so far.***

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Happy trading.


*** for the sake of disclosure, this performance is calculated on 2 lot basis trading my Homework and should not be used as a reflection of my trading OR my account size/position size. I take all my Homework trades but in position size consistent with my risk capital.