Trading Strategies

• Breakout 0pportunity for buying futures options - expecting maximum 8 opportunities in one year. Risk, probable profit and loss all defined in advance.
• Opportunistic fx spot, futures and future options trades based on our assessment of interplay of the short-term Correlations, Volatility, liquidity and Positioning in the Currencies market. Maximum 4 trades in a week. 180 trades in a year.
• Combinations of selling/buying options and spreads for directional trades to control costs, risks and deploy capital efficiently. Maximum: 8 trades in a year. Defensive in nature, the intention is to extract value from losing positions of bought options or fx futures.
• Selling options on both sides for income when we have a bias for range trading. Maximum: 8 opportunities in a year. Range-trading or Channel trading is a tried and tested way of making regular income by selling strangles, inverted strangles and doing re-adjustments/rollovers to keep them profitable until maturity.
• Semi auto-trading on spot fx platform that supports hedging: Randomly trading 400 trades a month with no directional forecast. The major requirement is that the market should be driven by high momentum and be trending strongly. Momentum is preferable to volatility.

Super specialization and maintaining consistency is our open secret

• Trading only in fx asset class for 35 years
• Sticking to three instruments - fx spot, fx futures and fx future options
• Trading only in two symbols (a) EURUSD for futures and futures options (b) GBPJPY for spot fx
• Extensive experience in using Leverage, Margin, Positions, Hedging, and managing liquidity:
• Using smaller positions for entries and waiting for the trade to happen
• Hedge adverse spot positions on non-FIFO platforms that permit buying and selling without closing the trades.
• Cover with fx futures and/or fx future options on FIFO platform that offers all the three instruments to trade.
• Experience in varying lots to recover adverse trades
• For futures and options, utilize strategies to make the most out of Chicago Mercantile Exchange's SPAN margin system. The margin system maximizes liquidity and sellers receive the option premium in advance which augments margin capital. Sometimes the premium is good enough to nurture a trade without really accessing maintenance margin money until the expiration date of the options.
• Primarily, we focus on risk management rather than on the risk-to-reward ratio. Getting better returns by optimal liquidity management is the goal.

The timing of trades

• Option trades are taken if they meet the predetermined value of theta and delta. We have developed our own mechanics and metrics.
• It is largely based on our own daily assessment of fundamental macro-economics and geopolitical events.

Price Action trading involves

• Reading the market without using any technical indicators. Strategies used are suitable for trending and ranging (or flat) markets.
• Locating price points where the risk of losing money is lower.
• Measuring the length of previous price swings to estimate the duration of trades in terms of price and time.
• Assessing price locations having a strong probability of momentum taking birth so that a breakout-like result can be obtained for purchased options quickly without getting hurt by time-value decay.

Risk Management

Choice of symbols

EURUSD: It is easier to manage this major currency pair because of its strong mean-reversion tendency. It is the most liquid currency pair with the least possibility of a flash crash we have witnessed in past two years. We trade this pair manually using both futures and futures options for comfortable risk control. Adjustment is an art that comes from practice.

GBPJPY: It is the most volatile currency pair for various reasons but still generates a lot of momentum-driven trading opportunities - on an average 150 pips daily high-low range and various swings (random trading) causing a turnover of 600 pips to 1,000 pips (depending on the size of the swing) in a day or at least 150,000 pips in a year. Consolidation periods are relatively far and few between for this currency cross-pair. JPY, being a financing currency, accounts for 20-22% of the global volume of the forex market. GBP volume share is 12-15%. To extract profit from this pair we will soon use semi-automated trading. The hybrid auto-trader will enter trade randomly as soon as it is launched. Risk will be managed manually.

Balance between Equity and Growth

Equity Growth is what we focus on. Balance Growth just gives us an indication of space we need to trade optimally.

Conservatively, our monthly goal for semi-automated trading is 15% growth in equity for a spot fx account. Loss from outset will not exceed 5% of the equity.

Equity drawdown will be kept to less than 10% (or a month's growth).

If we succeed in accumulating profits to around 30% then we will be in a strong position to maintain the maximum gap of 20% between the balance and equity growth with the banked profits growing consistently.

We use hedging platform for spot fx and don't employ stop-loss. We will utilize 30:1 leverage (3.34% initial margin) as permitted by European Securities and Markets Authority (ESMA ) regulations. Presently we are using 20:1 leverage (5% initial margin) as permitted by Hong Kong SFC regulations without hedging which is not available on the Interactive Broker's platform.

Equity Profit Taker and Equity Stop Loss will remain in place all the time. If the net profit target is met, floating trades will be liquidated and no hedging will be done. Profit booking or Accounting period will depend upon the profit target. It could be daily, weekly or even monthly.

Usually, we don't take a prolonged pause in trading because we feel the equity should keep growing even when positions have been locked in to control margins and protect equity decay. That is why our losing trades take longer period to end. Around 4 times more that than that of the winners. This kind of unconventional hedging strategy does exert pressure on us, but we have extensive experience in making continual trade adjustments.

In options trading, we compare the returns with margins employed . We keep 50% as a buffer for trade rollover adjustment management. Target is 60% a year on the account or 120% on the margin.

Hedging

Spot forex

In spot fx semi-automated trading, our focus is not on analyzing the market and catching any particular trend. The focus is just on managing risks. We will not use stoploss and hedging will be our main tool. The idea of hedging is to extend timeline and gain extra time for the market to move in our favoured break-even or profit zone.

Hedging spot fx is quite challenging. It is easier to handle a momentum-driven trending market than a volatile range trading one. Planning of the trading lot size and the quantity is important so as not to stall the trading when floating loss positions are locked in. Timing is very important. The holding period of losing trades also matters. Size of the profit target has to be chosen carefully to generate quick wins.

Future Options

Options selling without any directional bias requires continual account monitoring and the account should have a buffer margin to handle the stressed unfavourable side of trading. While making the adjustments or rollovers, the focus is on getting financed by the credit received rather than shelling out money from the pocket. Traders like Currency Options guru Dr Naga Mummaneni, are known to have handled 10 consecutive runs of EURUSD moving in the same direction without taking any loss.