Monday, February 2, 2015

Extreme Trading Idea?

Tiho at A Short Side of Long is my personal man-crush for being one of the most astute value investors that I know of, constantly flagging out extremes that could be the turning point of a major trend reversal.

He spotted this extreme in the currency market that I think mean-reverters might be interested in taking a look at.

And no, it is not the EUR/USD. The EUR has a very serious fundamental reasons why it is sinking and the tail risks are actually pretty fat in my opinion.

The market that he has singled out is Australia. To his aid, he has a trio of charts signalling extremes in the stock market, consumer confidence and the currency.




Personally, I see a few ways to play this potential trade.

1st idea: Look for a bounce of the support in Australian equities and go long. The risks are of course that if a global economic slowdown does happen, this will be a dead trade for a long time. A stop loss under the well-defined support is probably a good idea.

2nd idea: Long AUD, Short USD, which is the equivalent of buying AUD/USD. The problem with this is of course that you are hoping that both currencies mean revert together, ergo the AUD strengths while the USD weakens. This could be a massive mean reversion trade, but it is dependent on 2 factors that might not line up quite nicely. Unless the mean reversion is established, this could turn out very sloppy.

3rd idea: This is my preferred idea that I would ideally take. Instead of finding a specific currency to short against the AUD long, find a basket of currencies instead. Preferably they would be currencies that are very market neutral or currencies that have a strong potential to weaken more substantially. Perhaps a basket of 5 different pairs, 20% each will ensure that if your AUD long idea is a winner, you will be walking away with profits in the pocket.

My first experience ever trading with real money was with CFDs and going long the AUD/SGD pair. I made 140% of my capital in the first month. Please don't ask what happened the second month, ahaha!

2 comments:

  1. Australia has some pretty important interest rate implications affecting its currency. 1) Canada cut interest rates last month, and traders noting that Canada is also a mining economy like Australia, destroyed the AUD. 2) Last week an analysis wrote his views on why it is almost a sure thing that the Reserve Bank of Australia will cut rates by 25bps tmr.

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    1. Thanks ladykiller, you're really on the ball! Luckily I'm away travelling, if not I might've taken those longs and get slaughtered, haha! :P

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