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Currency Kings

Currency Kings

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How Billionaire Traders Made their Fortune Trading Forex and How You Can Too

BEN ROBSON


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Book Details
 Price
 3.00
 Pages
 263 p
 File Size 
 3,232 KB
 File Type
 PDF format
 ISBN
 978-1-25986301-1
 Copyright©   
 2017 by McGraw-Hill Education   

Introduction
I have been lucky enough to be involved in the forex (FX) market for more
than 20 years. I say lucky because I have always found the market fascinating,
dynamic, and often exhilarating. It is a massive market—some $5.3 trillion in
FX transactions is traded each day. The market ebbs, it flows, and then in an
instant, it can spike and retrace or continue to move in truly Brownian fashion.
There are so many factors that may influence a pair of currencies, and there are
thousands of traders pitching their wits (and cash) in the relentless pursuit of
profits and perhaps perfection.

There are some who argue that luck plays a great part in the success or
failure of any particular trader or philosophy. There are several theories that
support this contention. And it is perhaps applicable to the vast majority of FX
participants. But there is a breed of traders who reject this generalization and
quite rightly base their educated, risk-adjusted wagers on something a bit more
certain than luck. Some of these people either are already Currency Kings or are
on the right track to become future Currency Kings.

If I were to fully define what I mean by a Currency King, it would be an
individual who has made multimillions or billions in the FX marketplace by
scaling up a legitimate competitive advantage. The marketplace in my mind
encompasses spot, futures, forwards, and options as products and also
technology and innovation as a means to access and penetrate the market either
in a trading capacity or as an enabler of trading. The traders, speculators, market
makers, and technology providers you will read about have all made fortunes in
the FX marketplace, and some are integral to the market as it is today.

Going back through my 20-plus years as a foreign exchange dealer and
trader, there are people, places, and events that have led me to believe that
markets can be beaten. In a transactional sense, wealth is transferred from A to B
and markets are efficient, as Professor Eugene Fama and his “efficient market
hypothesis” suggests. But there are many instances when markets are inefficient
or predictable to a degree, where the odds of a payoff are not equal and therefore
favor one particular outcome over another, and there are traders out there who
consistently beat the odds. I have witnessed this, and it has inspired me.

From my very early days at Goldman Sachs, I found the energy of the
establishment and the people phenomenal. Goldman Sachs has some of the very
largest and most successful hedge funds trading through its market making desks
—in effect, these are super smart people executing colossal orders for super
smart people. Without doubt, in my mind, some of these funds had compelling
competitive advantages, and for many the competitive advantage was accessed
through the simple principle of hard work. Some of the global macro funds
employed exceptionally intelligent people to do their research. It may be a
simple analogy, but a concert pianist doesn’t become a concert pianist without
spending many hours a day plying his or her trade. Similarly, to get a sniff of
being a top global macro hedge fund trader, one needs, among other things,
intelligence, dedication, and application, not to mention some of the other
significant qualities such as courage, tenacity, and discipline.

During my time at Prudential Bache, I encountered other types of traders—
no less fascinating than the global macro funds that traded through Goldman’s
books—and these were trend following commodity trading advisors (CTAs).
What struck me about CTAs—of which there were many—was how aligned in
direction and frequency their trading was. Some days, there would be very little
activity, and then on others it was one-way traffic all day long. It led me to
conclude that many of the “black box” programs were remarkably similar. What
also struck me was that on those busy days, the market tended to “go with the
flow.” Hence many dealing desks had what is termed “flow traders” whose role
was to follow some of the “directional” FX flows.

The late 1990s and the early 2000s saw the arrival of many online market
makers and the beginnings of “retail” FX trading. This allowed many smaller
customers to access the FX market through small brokers. The unfortunate
statistic for retail traders is that about 80 percent of them lose money. My
experience working at CMC Markets in Hong Kong would probably suggest that
the winning percentage was slightly higher, but that was due mainly to the fact
of leverage restrictions imposed by the Hong Kong regulator. What CMC
Markets and many other retail brokers did, especially in their early years, was
take the opposite side to many retail clients’ trades. In some instances, positions
could become quite large, and so the strategy was not without risk. Those who
take risks are often rewarded, which was the case for CMC.

As the retail trading fraternity grew, and regulators became more aware of
As the retail trading fraternity grew, and regulators became more aware of
small brokers taking on large FX risks, the practice of straight-through processes
(or agency brokering) became the modus operandi of many retail brokerages.
Brokers would simply take a spread or commission as the trade passed “straight
through” to a bank. It turned out to be a positive evolution in the market as banks
would fight to be “top of book” (in other words, to offer the best executable bid
or offer price) in aggregated liquidity pools and distribute their liquidity through
retail brokers and electronic communication networks to end clients.

The reward for the banks was to warehouse the risk in greater scale than their
retail counterparts. Bigger balance sheets equated to more risk taking. If a bank
could supply pricing to several retail brokerages, it could collect the trades and
therefore potentially collect the 80 percent of losing trades. The natural
progression of this evolution was for non-bank market makers and ultimately
high-frequency traders to join the bandwagon and fight to provide top-of-book
liquidity to retail brokerages. In the case of HFTs, however, in many cases the
strategy was to be a maker and taker of liquidity, often capitalizing on pricing
latency between two counterparties to make nearly instantaneous profits. In the
zero-sum game of FX, huge fortunes were made by these three distinct types of
brokers and market makers, some of whom listed on worldwide stock exchanges
on the back of this trade. Retail traders were the losers of course.

Continuous advancements in technology and innovation have been at the
forefront of the FX market for the last two decades. Computer power has in
many respects replaced brain power and sleight of hand. In an arena heavily
influenced by HFTs, millions of orders can be placed (and canceled) in
millionths of a second, and computers are so powerful and rapid that one could
argue that markets are in fact nowadays practically efficient. And yet, there are
still avenues for arbitragers without supercomputers to make money. Finding a
legitimate competitive advantage may be tougher these days, but it can still be
done. Smart people will always find a way to make money.

My own experience as a proprietary trader led me to establish four basic
principles that I believe lead to trading success. These are covered in the first
chapter, but put very simply, they involve doing some detailed work on your
trading philosophy, working out whether you have a legitimate competitive
advantage, and seeing whether you can scale it up while constantly being aware
of your risks.
As an example, I will cite an arbitrage trading business I ran out of
Singapore and Dubai. My team and I had worked out that there were some
forward pricing anomalies in certain currency pairs. Our competitive advantage
was that we had some very good banking relationships and received superlative
pricing from our banks. Our challenge was to maintain both the banking
relationships and pricing and at the same time take advantage of pricing
inefficiencies. We had two of the four ingredients to create a highly profitable
trading business. It was scalable up to a point, and the risks were limited to our
counterparties, which were mitigated by using a prime broker. It turned out to be
a very successful venture—but not enough to make us Currency Kings. Scale
was the limiting factor. On another eminently scalable arbitrage, our firm lacked
the capital to support the trade to any large degree. The point I wish to make
here is that we found opportunities to make money, and there are still
opportunities today.

I am convinced that if you have the four basic principles stacked in your
favor, you can make outsize trading returns. You do not have to be the smartest
kid on the block either, as many great currency traders have only a very basic
education. There are plenty of traits that quality traders exhibit that can easily be
learned. Others will come with application. Trading discipline is perhaps one of
the key concepts that define whether you will be successful over the longer term.
My goal in this book is to give examples of traders, products, and ways in
which you can make money in the FX marketplace, point out the many obstacles
that you will face in your pursuit of profits, and give advice on how you can
train yourself to think smart and trade smart. One observation I have made in my
financial markets experience is that traders both big and small often employ too
much risk. Another, more so nowadays, is that they trade too frequently. It is
also well documented that the majority of traders are quick to take profits and
slow to cut losses. By committing to a disciplined strategy and sticking to it, you
will find that in most cases, trading performance will improve. Understanding
the risks and dangers of trading is fundamental to staying in the game. You can
beef up your tactics by learning from the Currency Kings.

The last point I wish to make is that if you are serious about trading, it is
possible to win. As with most things, if you wish to do it well, it requires
preparation, time, effort, and dedication. It also requires continuous focus, guts,
tenacity, and coolness under pressure. Trading is not a walk in the park. It is the
business of making money, and that must be front and center in your mind. If
you are at all blasé in your approach, then you will lose.

If the performance metric of winners to losers is to improve, then it starts
with adopting a serious attitude. And that means doing the work. Discovering
your method of trading will then come naturally to you. By avoiding some of the
obstacles in your path you will improve your profitability. If along that path you
discover that you have a genuine competitive advantage, then you are well on
the way to winning. How much so depends on the competitive advantage and
the way to winning. How much so depends on the competitive advantage and
how scalable it is. But always be mindful about the risks you take. There are a
lot of very intelligent ex-traders who have been incapable of managing their
risks, and there have been a great many spectacular blowups.

The book Currency Kings, I hope, will act as a guide and an aide-mémoire to
your trading activities. If the book inspires people to trade with a plan and with
discipline, it will have achieved most of its goal; if it helps launch a new
Currency King, it will have succeeded beyond my expectations.

Table of Contents
Acknowledgments
Introduction

1 The Four Basic Trading Principles

2 George Soros: Global Macro King

3 John Henry: Technical Trading Genius

4 Urs Schwarzenbach: Writing FX Option Strangles

5 Online Currency Entrepreneurs: 
How the Early FX Market Makers Grew from Pioneers to Billionaires

6 Jim Simons: Quant King

7 Renat Fatkhullin: Social Trading and MT4

8 Caveat Emptor: Tricks and Traps to Avoid When Trading Online

9 Top Tips to Improve Performance

Notes
Index


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This publication is designed to provide accurate and authoritative information in
regard to the subject matter covered. It is sold with the understanding that neither
the author nor the publisher is engaged in rendering legal, accounting, securities
trading, or other professional services. If legal advice or other expert assistance
is required, the services of a competent professional person should be sought.
—From a Declaration of Principles Jointly Adopted by a Committee of the
American Bar Association and a Committee of Publishers and Associations

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