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12 Tieroog Place, Moreleta Park, Pretoria, South Africa

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					12 Tieroog Place, Moreleta Park, Pretoria, South Africa P.O. Box 100972, Moreleta Plaza, 0167, South Africa Tel: +27 (0) 861-329-379 or +27-12-997-2414 Fax: (Intl) +27 (0) 88 012 997 0344 or (Nat) (086) 672-7128 Email: info@dayforex.com

The Unbearable lightness of currency trading …
1 October 2004

Dear Investor

We have reached the end of the third quarter of 2004. Hard to believe, isn’t it? Well with the end of this quarter we have hopefully put behind us all the shenanigans of the “CMS- 3332” issue. Unfortunately this issue has had a profound impact on the meaningful progress of the managed account programme. I guess we had to go through the whole loop and at the end of the day we can at least say, now we know what not to do next time something like that arises. Before I turn my attention to the market and the little bit of trading I did in the past quarter, let me just address some other issues that occupied my attention and contributed to the rather limited trading.

Finding a suitable counter party

This was (and still is) a much more complex job than one may think. I basically had to consider the total counter party risk, considering a growing number of clients and more capital under management. One does not want to become too large a client of a smallish liquidity provider, especially if that liquidity provider makes money from taking positions against its clients, like many of the FX brokers do. This prerequisite forced me to look towards the bigger firms from the more longstanding professional market, now offering services to “retail” clients and retail money managers like DayForex. This in itself was not difficult – there are several options. More difficult was to find a partner that suits the peculiarities of our approach, namely very low leverage. Most companies still look towards 100,000 unit lot sizes which on small accounts cause unacceptably high leverage. To find a partner with the right corporate profile and offer 10,000 unit lot sizes was virtually impossible. Many are looking towards it, but we had to find a partner immediately.

DayForex Capital Management CC Reg No: 2004/048473/23. Members: Prof. C B du Toit; D D du Toit (Managing)

By now it is old hat that the choice of SAXOBANK eventually was based on a misunderstanding with regards to the cost implication of trading with the low leverage. This realisation that came just as we got going towards the end of July was really salt in the wounds and for all practical purposes I had to start over again. With the pending resolution of the CMS 3332 issue I decided to, for the moment, stick to the known Forex Solutions, one of the small companies, but unlike some others, founded and run by Forex market professionals. While we can deposit larger amounts comfortably at SAXOBANK, we only had to find a home for the smaller accounts and FX Solutions were the ideal option. “ Better the devil you know than the one you don’t.” Today we are settled in with both these companies and the peculiarities of their systems including administrative, trading, back office and the like.

Regulatory changes in South Africa

This was another frustrating and confusing exercise during the last few months. It was so because of the search for a new liquidity provider, and the fact that the new regulations called for approval of the liquidity provider, mandates used etcetera. Furthermore, uncertainties existed regarding experience and qualification matters for the likes of myself. 30 September was D day, but with a huge backlog the FSB announced a blanket exemption for those companies whose licenses has not yet been issued – like DayForex Capital Management. This then serves as the obligatory notice that DayForex has to give its clients until we receive our license, hopefully not too deep into October. If you want to lodge a complaint against DayForex during this time you can contact the FAIS Ombud. For what it is worth, the Forex Investment Association, whose task it was to assist in the licensing of forex companies, did approve DayForex and recommended to the FSB that we do receive a license. As this only happened in early September (as far as I know it was the first completed forex application the FIA processed) we expect to have the license towards the end of October (within 6 weeks they say). This matter caused me to spend some time on preparing a marketing programme in South Africa by making use of the financial advisors structures, but everything has been held back because of the regulatory impasse (felt by everyone). However we are also through this.

“Bird watching in lion Country” - “Retail Forex Trading Explained”

This is the title of my book on currency trading. The project took longer than expected, but it has now also been finalised, the I’s dotted and T’s crossed. In itself it was a good exercise during the time of trading impasse since February / March and it really helped to formulate the trading approach and system on paper. At least I have no doubts about what I should do. Now it’s a matter of doing it for your benefit.
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One very positive aspect of the frustrating last six months was my involvement with a gentleman who specialises in creating automated trading systems – taking the emotions out of the thing, let the computer to the work. What is so positive is that this gentleman is absolutely over the moon with the results of the trading system. Not only were the original back tested results very exciting but also since April we were operating in a real-time scenario, i.e. we can already verify the results on six months’ real time data. For me it proves that the strategy (4X1), median trading within a correctly chosen median grid, combined with my rigorous critical analysis of market information and my resistance to chopping and changing, but rather see out the hard times, by limiting trading and overdosing on patience, will see us through to many years of success. I say it and I mean it.

The currency market – overview

Like last year the market basically sold off and went into hibernation during July and August – the summer holiday period in the northern hemisphere. So lets look back and see what happened last year with our fledgling portfolio during these months:

July 2003 Settled trades Profit percentage 0 -8.2

August 2003 2 0

September 2003 9 12.6

Our one-way trade was long EURUSD and the euro started out at 1.1900 mid June 2003, hit 1.1600 by early July, 1.0750 end of August and 1.1500 end of September. This year we had a similar scenario, with the exception that I was also and even more interested in GBPUSD because GBP retraced so far from its earlier highs. The whole quarter was however dominated by long positions I took in GBP after it retraced from 1.8800 to 1.8000 in a few days in the middle and end of July. Being the first trades in a while (recalling nerve wracking moments of being an opening batsmen at cricket) I opened these in mid August, expecting a return to recent highs and I hung unto them, but unfortunately it became a rocky relationship with GBP being sold off on an end-of-rate-hike-cycle while the USD was at the beginning-of-rate-hike cycle. The low volume summer vacation trading is also very rocky on all the major data releases and all the economic variables and I decided to sit back and do less and wait for things to pick up. Unfortunately September did not give clear direction and a lot of uncertainty still exists in the market. We are therefore still busy picking one here and one there to limit the GBP damage and wait for “direction”. (Which usually never come, before its too little too late!)

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Looking ahead

The technical analysts looking at the bigger picture still see a stronger dollar in the charts before the “fundamental” return to the weak dollar scenario. This means we will be nervously hoping they are wrong, because we think the recent Q3 lows are the lows or very close to the lows, that there will not be a prolonged further big retracement and that the fundamental euro and GBP up trend will take shape sooner rather than later. We will also back ourselves and buy any dips towards our median Q1. I have refrained from joining the Japanese Yen party, but am currently seeing an interesting fundamental trend development there also. I took the plunge today (October 1) and bought some JPY at 110.40. If it looks good you may find yourself constantly in possession of JPY during Q4. (I am hedging my GBP bets a bit, considering that what poses risk for GBP is absolutely non existent in JPY terms). Because the fundamental drivers are so different it is quite possible to have manageable divergences in GBPUSD and USDJPY. This is a short quarter as the deposit for the holiday at the sea has been paid and it seems like we will have an early close around December 10. With most of the distracting things behind me and a little bit of lady luck’s help (she short changed me this year) the next “Unbearable lightness” may be a little bit more bearable.

Returns

Difficult to express properly as most accounts were opened during the quarter and then suffered on higher geared GBP trades because of the “ticket fee” issue. The older accounts returned about (7.8%) for the period 1 July to 30 September, mainly due to one GBPUSD trade (series of entries) described above and passiveness while waiting for “better days”. September was slightly positive.

Kind regards

Dirk du Toit

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Description: 12 Tieroog Place, Moreleta Park, Pretoria, South Africa