[GOFX:6] Wild Ride, Carry Trade Demolition Derby

Hello again Traders,

In our last update, we talked about the anticipated downdraft in the markets. Last week, through a bit of turbulence, the markets were very uncooperative. But now.. whoa... it finally happened as we expected.

As you may have seen, last week was a very frustrating week. Unfortunately, not every week can be a good market to work with, even for Institutional traders. Positions were attempted, correlation signals seemed to be good; defensive moves were adjusted, but due to the volatility of the markets there was simply very little follow thru with price action.

Subsequently, any gains would be short lived, and price action would reverse causing stops to be hit. Leverage was purposely kept low due to the questionable market conditions. We simply will not put on large positions in questionable markets. Its suicide. We will however, use small positions to test the markets and do so over frequent trading. If the markets move in our favor with a reasonably strong and responsive momentum, then position sizes will be increased accordingly based on prevailing market conditions.

We were expecting large moves in the market, but were unsure of when they would occur. Accordingly, as we were anticipating these moves, positions were purposely kept at a minimal size so that just in-case the moves occurred in the reverse of what we expected, our losses would be minimal, easily manageable and we would at least be able to quickly adjust to the proper direction of the move and could then increase position size once the momentum was confirmed.

As you have seen, the large moves occurred last night, sufficiently so that our overnight gains are about +12/14% as of this writing. We expect further downside in the markets and will monitor them accordingly.

An interesting note: We have been receiving a lot of requests to increase leverage. I find that to be very interesting considering the fact that it is due to an over-amount of leverage used in the markets today that is one of the major causes of the carry trades being unwound and credit spreads being widened. Leverage is a two edged sword and can hurt as much, often times worse, than can help.

We have a strict policy about the use of leverage. We will initiate positions using small test sizes. Many times less than 1:1. If the markets move as anticipated, positions will be increased up to 50% of the maximum approved leverage for the particular market conditions, i.e.: scaling in. We prefer to maintain stops/drawdown to around 1/2 - 1%. If a position begins to go into drawdown, nearing 1/2%,positions are thinned to reduce the amount of potential drawdown. Once the markets move back in the anticipated direction, position sizes are increased should the market conditions warrant. Using last week as an example, if normal leverage size positions were used, draw-downs would have been much great than the 1 - 1 1/2% we experienced.

Alternatively, when the market conditions warrant, such as evidenced by the strong market moves overnight, applicable leverage will be used. Just to share some info about last night's action, the gains made were done so using a maximum leverage 6:1. Any higher, the quick actions/whipsaws experienced overnight could have resulted in higher than normal give back of part or all of the gains. One of the major pairs traded overnight was the AUDJPY. When the markets spiked down a few times, the institutional pricing structure we use actually was inversed, as traders were scrambling to exit at all cost. LOL, I just love covering into a crowd. Prices didn't matter to those traders and it showed. Inverse quotes, widened spreads, sharp snapbacks 20-30 pips moves in a glance. This was in our institutional platform where most of the time our spreads are zero to two wide. I can't imagine how wild the retail spreads were acting last night. Wild markets indeed! Gotta Love it!