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# John Taylor foreign exchange market super trader

cashbackforexpipcalculator the cash foreign exchange market at cashback forexs inception, John Taylor (JohnTaylor) almost accidentally involved in it subsequently he experienced the technical trading revolution era, cashback forex calculator Online found cashbackforexcalculatorOnline the absolute rate of return financial strategy cashbackforexprofitcalculator far more attractive than hedging hedging risk 1972, he founded Chemical Bank foreign exchange advisory services, and developed the first generation of The company currently manages more than $8 billion in various projects, most of which are focused on foreign exchange trading and at the same time, Taylor is also a pioneer in the analysis of the cyclical nature of foreign exchange and was one of the first traders to use technical trend tracking models in the foreign exchange market. FuturesMagazine (FM): Youve been involved in the cash FX market for over 40 years, and what are the key changes that have occurred along the way? John Taylor (hereinafter referred to as JT): Now people are finally aware of its existence I remember when I went to a cocktail party and talked to people about my career, everyone walked away, but now they are after me instead Also, the market is getting bigger and bigger, there are more and more participants, competition is getting fiercer and it is getting harder and harder to make money You know that everyone in this industry is elite and talented, even if there are stupid Even if there are stupid players, there are professionals who can advise them, and competition is everywhere FM: Can you tell us what you mean by stupid players? JT: Such as central banks, government, General Motors, Boeing, etc. These departments and institutions entered the market for different purposes, so you can make a lot of money according to their needs. risk management approach, and also, how is this different from the way commodity trading advisors (CTAs) conduct transactions? JT: Actually, managing hedging is not attractive because if you make money, that means your client is losing money on the investment, and conversely, if the client makes money on the investment, that means you didnt make money and he will want to know what you really did there. Imagine, some times you make a lot of money because the client made a bad investment, then for the client, its a bad deal and he owes you money for it, the client will be full of anger, on the contrary, if he makes a big profit the next year and you lose money, then the client will think that all the money you lost is his and he will regret that he shouldnt have done it in the first place. Absolute Return Business FM: Since the launch of your first trading system in 1987, you have been working on and introducing different trading models, but as far as we know, most of your trading has been limited to Forex business, why is that? JT: One of the reasons is to trade the market, and to be able to get a foothold in that market is enough to show that you do have a skill set. Interestingly, forex trading takes up a lot of our time, and we do put a lot of thought into it. Were working on short-term models and different kinds of mean reversion models, and volatility trading instruments have become the star of our firm. Stock indices, few focus on currencies as much as you do, why is that? JT: Its a very tedious business unless you know the system very well and are very proficient, which includes the back-office operating system and the pricing system You have to know the options curve inside out, and then program it into the system after years of tracking research So, when we decided to do options in 2002, we found that we had to start from scratch because no one had done a comprehensive, systematic analysis of options We then found it very difficult to create our own data because all of the historical data itself was inaccurate. In actual trading, the system would always make trading errors, and when the historical data showed a good opportunity to trade, the opportunity might not have actually occurred because it was an error. In 2008 we hired an expert from HymanBeck, who was an engineer and had been in the business since the 1980s, and because of his expertise, he got along very well with our systems staff. In the past year, we have invested 35% of our total investment in options contracts, which is large enough to show the importance we place on options trading. Volatility trading is an area that has not been touched by the foreign exchange market. Our investment transactions can have a significant impact on market liquidity, and it is interesting that we are starting a business of this size, but it is a business that the banks are also doing, but do not underestimate this business, in fact it is a huge undertaking, it is not just a premiumcollectionstrategy, but both. Our job is twofold, one is to get more people investing in fixed income products and equity indices and, of course, maybe commodity instruments, and two is to trade OTC options, so you dont have to work around the strike price to carry out an investment strategy options space is not quite the same because it doesnt have a strike price or an expiration date Nowadays, options represent about 12% of the assets we manage FM: Do you have very few competitors, especially when it comes to selling FX options? JT: In addition to the fact that part of the business we do is price-based, we have much stiffer competition in other areas, you know, options themselves have many prices and most importantly, we dont trade in a mean-reversion model. Spot trading and looking for trends in addition to that, we also do cyclical forecasting, and this forecasting will tell us that the yen pricing is seriously off, for example, instead of 81 or 82 yen to the dollar, it should be 65 yen to the dollar The question we face is, what can we do in this spread? Obviously, one can use this spread to do any gamma-related trade with little risk and a lot of money When you put it together with options, our knowledge of trading in the spot market can be applied and show real value FM: So, is cyclical research different from a trend-following approach? JT: To be precise, cyclical research is part of a trend-following approach, part of an interest-bearing trade, and you could even say its part of almost any strategy If, say, when a trend is forming and theres a trend movement over time, at that point the cyclical analyst might say: Its been going on for a while, this trend is coming to an end if were already holding a long position, then were probably If were already long, then were probably not going to go short anymore. JT: Since I worked at First National Bank of Chicago and was the first board advisor to the Chicago Mercantile Exchange (CME), I was late to the trend-following party. The head of First National Bank of Chicago was going to do a study on this, but it was put on hold and I took over by mistake. At first, they couldnt believe that the proud and arrogant Chicago bank would send a guy who didnt know anything, but I had to sit with them, which, in retrospect, was embarrassing, and thats when I started learning about trend following, but I still didnt believe in it, because I was more of a believer in the random walk philosophy. I had a guy come up to me from Chicago and say, "I recently made a killing on four trades based on the 19-day moving average." To be honest, I wanted to kick him in the face when he said that. I worked with George (George Herrdum), who was a very famous mysterious genius, who had been trained in Chicago and had represented a German computer company on the Chicago Mercantile Exchange, and who was very good at computers and mathematics, which, in his words, was something that could be calculated. But on the other hand, he was a rather demanding person, but I worked for him for a year and a half and ended up with a good blend of cyclicality and trend following philosophy and thats how it came about a year and a half later, when I started my own firm, my first client was Citibank because they wanted to know where they could make investments I designed two or three investment solutions for them and they later sold the They sold them to people in the Middle East and made a fortune. FM: Have you ever thought about applying a trend-following model in a diversified market? JT: Honestly, never before, but now were starting to try because in general were supposed to be more macro managers and its not good to focus too much on currencies, so were looking to expand ourselves FM: How is the FX space different from other areas? JT: Its extremely liquid, theres$3 trillion traded every day even in countries like Chile and Israel, and theres plenty of liquidity FM: Is it easier for hedgers and speculators to find a balance in the FX market than in other sectors? If so, does it make it easier or more difficult for them to trade?　　JT: Generally speaking, it makes trading a little easier because hedgers are more demanding of balance. The analysis is not done properly and thats where they are weak and you can take advantage of the relative advantage and make money out of it maybe, thats why my options strategy is successful options trading is very noticeable because all the guys will trade options with fools money and they use options for self protection while they are engaged in other businesses and thats the beauty of the options investment strategy in the 1970s. When I was at Citibank, our clients were IBM, Coca-Cola, Renault Tobacco, Kodak, and they traded in the foreign exchange market a lot because they had sales overseas, they had dividends receivable to invest, so they always said Im going to get the best price now they call the bank and say theyre going to get the best option price and use it to lock in risk which is really the worlds stupidest But a lot of U.S. companies do this they call multiple banks and tell them that in the last six months of the year were going to collect 200 million euros, recommend the right series of options for us so the bank gives them a price and they might say thank you very much, this is much better than other banks, well buy it and after the sale is done they still think to themselves I dont have foreign exchange risk anymore they pay the They pay the bank a lot of money and the bank makes a good profit on the sale of this because if theres no profit to be made, the bank wont sell to them and now they can go into the interbank market or just buy and sell and lock in the risk forever. I was talking to a member of the InternationalAssociationofAmericanTreasurers about seven years ago and said, "Its like Alice in Wonderland. I knew some of you 15 years ago when we were fighting in the foreign exchange market to make more money. wonder why the foreign exchange management of the banks make so much money, it is because you guys pay them to buy and sell options and make them pots of money their decisions may be wrong or right, but after the pluses and minuses, they often give up better opportunities and thus switch to the banks in the options trading market, many people engage in hedging transactions, these hedgers do not appear in the spot market Then, after the underhanded operation of the banks, these investments are converted into forward transactions, such as Citibank, JP Morgan Chase, Goldman Sachs, these banks basically control all the companies in the U.S. They are very experienced in investment, so they will not fall easily, so the spot market trading is much tougher than the options market FM: In recent years, hedging transactions (carrytade) JT: Its unbelievable that carrytade is actually a stupid trade, it shouldnt work in theory, there are thousands of people doing carrytade, so all the interest rates will equalize at the same time, the forward rates are absolutely lower than the interest rate differential between currencies, and over time they will eventually equalize so nobody should be able to borrow at the lowest rate and invest at the highest rate in the currency. currency and invest in it at the highest rate, so you dont make much money but it doesnt work that way in fact if you borrow currency at a low rate and invest in it at a high rate, interest rates will go up obviously the unhedged money will flow into the country because of the higher interest rate and the currency of that country will appreciate as a result and interest rates will go up along with it so the hedging trade is doing very well now unless one day a country with relatively high interest rates says our exports have been forced to stop and the economy is doing very badly because our currency has appreciated too much, in which case a crisis is likely to emerge but how often does a crisis occur? The cycle is about 10 years, but the carry trader will have made a lot of money in the other 9 years. So, all you have to do is to try to avoid a crisis. What are the most important factors to consider before using a carry trade strategy, other than the obvious interest rate spread?　　JT: We always look at trends, we always look at spreads, we always look at cycles, we always look at volatility. The higher the volatility in a carry trade, the worse the trade is. interest spread, so you can put your money in Argentina and get paid 9.6% the Argentine currency depreciates 4.5% after one year 5% and you almost make 5% they operate the investors injecting the money and reap the extra 5% so the trend is not always on your side in Argentina the volatility is 4% per year which is very low which means that this system adapts to this volatility the trend is not good and the system does not like it. If you can make a profit, the system likes it; the cycle is working fine, but its coming to an end because if the rest of the world economy collapses, it will be saved by the commodity market, but if the commodity cycle ends, Argentina will be in a lot of trouble FM: Based on your experience in identifying dozens of currencies, which currencies are weak in terms of stability and value? Which currencies are strong?　　JT: In some ways, the best currency in the world is the Swiss franc because its surrounded by the euro and all the money flows to Switzerland, which makes the Swiss franc very strong, but of course the Swiss government doesnt like that, which is not necessarily good for the dollar, but Europe is ecstatic about it. Living in the north and being self-sufficient like Singapore is really enviable, and Asia is even better Its a three-tier world: Asia first, America second, Europe third FM: People have been predicting the disappearance of the euro for years.　　JT: The euro is really difficult to survive they may be able to change the euro, but first of all the euro should be made absolutely unified this means that the money from rich countries is flowing to poor countries or regions as a kind of funding rather than loans or taxes, this is what we are happening in the United States, the rich states pay taxes to the federal government, and the federal government then allocates the financial taxes to poor states, such as Maine we look at Greece Greece gets funding from Brussels, and the situation is very similar. People in poor areas have to receive transfer aid from New York if they want to live on an equal footing with Germans or New Yorkers, and although Europe doesnt want to, they have to either do a major reform and reduce the scope of the Eurozone, or they have to donate their own money to those poor countries. The German euro to the dollar, and the Greek euro is at 0.7 to the dollar so that said, I dont see the future of the euro at all, the difficulties arise when they try to figure out what to do with the euro, some countries may be driven out of the eurozone, all kinds of troubles follow the euro unification, difficulties FM: Do you think China will eventually let the yuan float?　　JT: Yes when it is realized that this is the right thing to do, they will follow their own plan I believe that the yuan will become the worlds common currency FM: So do you think the Chinese will win this battle?　　JT: Of course, so far we cant make TV sets, we cant make boats, we cant do anything because China is doing all these things so we are at a disadvantage FM: There is a lot of talk that the dollar will be replaced as the worlds reserve currency, is there really a currency that can replace the dollar?　　JT: In my opinion, only the renminbi has that possibility but the Chinese are not going to do that, they wont let the renminbi float, theyre not ready for that I think until 2020 the reserve currency will still be the dollar after 2020 its hard to say there may be a transition period where there are multiple reserve currencies at the same time but that will eventually be ended by the renminbi because people will eventually choose only one reserve Currency FM: What does that mean for the dollar?　　JT: If we lose our reserve currency status, that would be a very serious problem, but we dont intend to give way whenever the rest of the worlds commodities are trending bullish, the reserve currency is going to depreciate; and when the world economy gets bad and illiquid, the reserve currency becomes more valuable so when the dollar goes up in a recession, and when the dollar goes down in a boom, thats the most important thing to understand about the currency market today. In fact, that wasnt the case before, but it is now. So, in 2008, the dollar suddenly strengthened, and then the Fed printed a lot of money, and the dollar weakened from March 2009 and then strengthened again in April and May of last year, because everyone was talking about raising interest rates and slowing the growth of the U.S. currency. (Bernanke) stated that he was ready to print more dollars and the dollar started to fall and the world economy grew in response and now that the Republicans are in power, they dont want to print dollars anymore, so guess what? The dollar has stopped falling again and economic growth has weakened so that 2011 will be the year of the Great Recession FM: In your opinion, what steps will have to be taken to return to more normal fundamentals?　　JT: There are not that many dollars flowing in the world, so I dont think normal fundamentals are coming back FM: So how does central bank regulation affect your trading?　　JT: Its not good for our trading some of the time we can predict it, but most of the time its not predictable its a pain in the ass for us, but sometimes its easy to fix it thats one of the reasons why hedging is doing so well for example, Indonesias central bank has announced that the country is undercapitalized and must keep interest rates high, we dont let the currency rally, we intervene in the currency appropriately We will intervene properly in the currency, buy and sell the currency to make sure it is smooth and stable and to be honest, I like it when central banks do that but then they will suddenly change their mind and say interest rates are too high, we dont need any capital, we dont need any capital anymore, so they start expelling capital from overseas and if that happens, were screwed, in other words, the reason hedging works so well is because there are central banks in emerging countries that say I know how to get capital to flow here So, in a way, sometimes central banks do a really good job. FM: Are central banks more or less regulated now?　　JT: As before, it depends on their motivation. They have too much capital now, so it looks like they want to intervene a little bit more, but if the world economy goes into recession, theyll change course.　　JT: Honestly, the Fed is struggling because we have so much money overseas that its difficult to fully manipulate it plus our banking system is completely open, which makes it even more difficult to do so For the U.S., if it wants to successfully manipulate the dollar, it has to take more control