XRP Thesis: Trade finance disruptor of the future?

There are many reasons why people are so excited about Cryptos.

 Instead of looking at stores of value, let us look at Use Cases instead or the practical applications of a crypto currency. This way, it is easier to manage expectations into the future.

The leader at this point is Ethereum with it smart contracts via the Virtual Machine. Its clear Use Cases include rental contracts, insurance, sports betting etc. However, my crypto of choice is XRP because of its clear use case in disrupting a 1.6 Trillion dollar industry. Trade Finance.

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R3 via its distributed ledger platform Corda is able to process accounts receivable purchase transactions and letters of credit. For anyone familiar with trade finance the traditional processing of this work tends to be arduous.

Although Corda in itself is not a crypto but a “blockchain inspired” system.  But there were statements that Corda will support digital currencies “later.” The SBI group which is both part of the XRP consortium and the R3 consortium alluded that there may be synergistic areas, this could be one of them. 

Small problem, there is a lawsuit between R3 and Ripple. I will not go into the full details of the lawsuit, but needless to say, it is messy.

However, the proof-of-concept is certainly place for the potential for such a platform to be developed.

XRP is already used by banks, and it has been rumored to be restarting its Codius program (Ripple’s smart contract platform).

Given the stakeholders within Ripple themselves, I would be surprised if they are not tackling this potentially disruptive technology head-on.

The below reasons are why I believe Ripple will be the first to tackle the trade finance problem. I will use R3 and Ripple interchangeably because I believe the strategic thrusts of the two companies is to tackle the trade finance issue.

So when it comes to finding an edge, I like to refer to traditional economics. Here I refer to one of Warren Buffetts most recommended books, Adam Smith and the Wealth of Nations. 

Based on the concepts of Adam Smith, here is why I believe Ripple will succeed.

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1) Division of Labour /Specialization

The point of Satoshi Nakamoto paper was for no one entity to have complete dominion of the system. However this creates an unfocused network.

While most other Cryptocurrencies do have own development teams, they are often fragmented and have a tendency to be decentralized.

One team may be trying to tackle the rental contract Use Case, while others are doing Sports Betting. And within each team there are different sales staff, developers , testers, administrators etc..

Ripple has a singularly large team with multiple offices in locations all over the world. This ensures a concentrated effort towards a goal or multiple goals.

If Adam Smith has anything to say about efficiency of division of labour, he would most likely say Ripple has the most competitive edge here.

2) Productivity

Trade finance is that it is arduous and systematic, the ideal candidate for Automation. However, it requires advance knowledge of each various part of the value chain.

This requires a team who is an expert in each area so they can work systematically. This includes understanding the legal implications of trade finance and could be why R3 released the following paper:

Source: https://elaineou.com/

So now that R3 is no longer on friendly terms, is the Ripple team able to either 1) patch things up with R3 or 2) develop their own technology.

I believe the answer to be yes. This again because of the consortiums on both ends of the equations. The management will act in the best interest of the consortium.

3) Invisible Hand

The invisible hand mean that everyone will act in the interest of themselves, this in turn will benefit the community.

My belief is that Ripple has the economic means to support and attract the best developers and coders in financial terms. This best talent would likely mean the fastest to the use case.

Moat

Warren Buffett discusses when value investing, having a moat. One could call this a competitive advantage.

Does XRP have such a moat? Can such idea work on other platforms with smart contract enabled features such as NEO and ETH? Yes, in theory but banks will unlikely use it.

Charley Cooper, managing director of R3, once quoted that ETH has “issues around privacy controls, scalability, immutability of transactions, and consensus mechanisms for validating transactions”.

If this is true, then the moat will hold true till we see a new contender.

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But What If I Am Wrong?

So say I am completely wrong and this is not the business direction Ripple is headed towards. The downside risk to XRP is still limited.

Fastest Execution

XRP is already used by banks. Not just for the added privacy but for XRP speed of transfer.

Meaning there is use of XRP in its base form, so there is already some value there. Marketing efforts to use XRP have also been ramping up, Ripple offering rebates for financial institutions that are the first in their markets to process and promote commercial payments on RippleNet.

SWIFT, the current payments gateway for banks, is trying to compete with XRP by creating its own Cryptocurrency which may be better than XRP. But it is still in the Proof-Of-Concept phase.

55 Billion in Escrow

In order to reduce uncertainty as well as maintaining ongoing XRP distribution, Ripple has committed to placing 55 billion XRP into a cryptographically-secured escrow.

By securing this, “investors can now mathematically verify the maximum supply of XRP that can enter the market”.

This stability brought about by Ripple themselves means that even though upside is capped, downside is also somewhat capped.

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Summary

Given that XRP is over 70% owned by banks, and some of the consortiums money will be tied up, I doubt the volatility especially to the downside will be taken well by the invested banks.

So what we have is a cryptocurrency with a potentially massive use case, if successful. Even if unsuccessful, the downside is limited. 

Long Ethereum Thesis - (Part 3) Managing Active Trading

This thesis a super long term play and I am thinking of getting involved in this via Brick and Motor mining so this is a big play for me.

On the eToro network, here is how I will be playing this by drawing inspiration from some of the most successful trend followers.

Source:http://turtletrader.com/images/trend-com-big2.jpg

The Value of Ethereum is currently linked to an extremely positive sentiment.

Bubble?

One of my recent readings was titled "Extraordinary Popular Delusions and the Madness of Crowds" and it covered financial bubbles. While I do see Cryptos as potentially being a bubble it does form an interesting topic of conversation in terms of how it is likely to react to an open market situation.

A study by Meb Faber titled "What if (Sir Issac) Newton was a Trendfollower?" shows that even during periods of Bubbles, the use of Trend following strategies provides for a better returns with lower drawdowns than buy-and-hold strategies.

So which trend following strategy is best used?

I don't have a good frame of refence given the short nature of Cryptos but we do know they are an

- upward moving

- unlikely to return to reviously known lows
- possibly fueled by credit in the future

These are characteristics where perhaps the turtles provide the best frame of reference.

Looking forward by looking back

The turtles for those who do not know is a bunch of famous traders who used a leveraged strategy to bring profits back in the day. They had the distinct advantage of having a market somewhat similar to what the Cryptos are.

I believe we can use their framework. Taking from the book "Following the Trend" we will take a modified long only approach as i did notice for instruments such as bonds, it has been unfavourable to trade both long and short due to the single tradrectory. Also modifactions were neccessary due to using CFDs as opposed to Futures contracts, hence the calculation of vol and risk is different.

I will employ a short only on BTC, and only selectively.

• Long entries are only allowed if the 50-day moving average is above the 100-day moving average.

• If today’s closing price is the highest close in the past 50 days, 

• Position sizing is volatility adjusted according to the ATR-based formula. Risk per trade will be 0.5%-1%

• A long position is closed when it has moved three ATR units down from its highest closing price since the position was opened.

Accuracy is expected to be low, around 30-40% but returns if the call is correct will be much larger than risk capital taken.

Long Ethereum Thesis - (Part 2) Bubble or Not

Source: https://pbs.twimg.com/media/CO3fihqUAAA2VMS.jpg

Proof of work vs. Proof of Stake

Proof of work is how transactions get processed on Crypto networks. Ethereum CEO plans on moving away from this to a proof of stake.

I will not go into this in detail but this is one of the reasons why i prefer Ethereum over other cryptos.

Briefly, miners currently use large amounts of computing power to solve problems. Once the problem is solved, they are rewarded.

In the future, Ether will owned by a validator who will use their own Ether to validate transactions. I.e. Individuals who have more access to coinage are more likely to get more fees.

They will then a nominal interest on this. My understanding is it is 2%-15%.

This should encourage a gradual accumulation of coins and a potential bubble could form. If leverage becomes accessible then this will be even more the case.

This creates a fixed income type product. Its nominal value may never diminsh due to the cap in coinage.

Because of this, a reinforcing cylce(ala Sorros) could apply here.

Possible Risks and Exit Theses

Of course, these things may not apply if forces more powerful than us determine that it is not to be.

So here are a few exit points where I will no longer be holding on to the thesis. This lis is of course not exhaustive and I will be constantly be looking out for reasons that I am wrong. 

• Etherum uses proof of work, and price does not seem to be gradually increasing due to the low amount of interest
• Bitcoin sudden adaptation of alt coins in their network
• Hard forks due to global disagreements
• Too much Ethereum in the hands of too few(due to the risk of forks)

Long Ethereum Thesis - (Part 1) Long ETH short BTC?

I have often accused Crypto currencies of being bubble territory. This has not changed, especially for Bitcoin.

As Warren Buffet says about gold, it looks nice but have no real value.

Ray Dalio, one of my absolute heros in trading buys gold because of historical context.

Cryptos do not have any real value or historical context.

So I have been skeptical. Until now.

Source: hhttps://i1.wp.com/coinspondent.de/wrdprss_XXX/wp-content/uploads/2016/10/Bitcoin-vs-Ethereum-1.png?fit=672%2C372&ssl=1

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Bitcoin to me, had a value-add no different from Western Union and to a certain extent Visa and MasterCard.

It was a way to transfer value between parties effectively and at little cost.

These are two industries have significant distprutive value but not a lot.

Bitcoin works as a base means of transferance currency. That is all.

Advantage 1: Smart Contracts

Ethereum has ability to produce smart contracts. The business model allows for contracts and conditional transference.

A common example, is the vending machine. You put in the money, it is irrevocable and it will produce a can of soda in exchange.

The ability to define properties and produce payment is staggering.

There are already applications to gambling, airline insurance and even stock markets.

I can see potential even in the alibaba.com space or trade finance, it is could be a major disruptor.

Disrupting these areas are much more lucrative.

Advantage 2: Decentralized Independent Cryptos

Ethereum has a mover advantage over its competitors.

It has the DAO (Decentralized Autonomus Organization) which allow for other cryptos to form off of the ethereum network.

Dai for instance, another crypto currency based on the value of SDRs (Special Drawing Rights) is on the Ethereum network.

Augur, an online prediction site is being developed utilizes the Ethereum network.

These are coins on their own, but run off the Ethereum blockchain.

Advantage 3: Friendly to users

The Ethereum Virtual Machine (EVM) allows all programming languages to use the network, meaning it is also accesible.

Advantage 4: First mover

In the above 3 advantages, they are the first to move into this and are currently the largest.

Dash, Litecoin, Ripple etc are not as developed in these areas.

With so many projects in the pipline, i do not see other cryptos affecting these advantages.

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Even today as I publish this post, BTC rose 5% while ETH did practically nothing. It is apparent that Bitcoin is still the favoured child amongst Cryptos and is quite possibly in a bubble. However its long term value to me is  questionable.

In Ethereum, there could quite possibly change the world as we know it and they are ahead of the pack. Till this vision is realized I will be long.

Stay tuned for Part 2 & 3 where i go into further depth on my thesis and how I will manage this actively.

My reflections: I just tried auditioning for 2 prop firms (Part 2)

1st Target for eToro: All-Weather

My All-Weather strategy has not been used simply because ETF leverage is very expensive. I did not know this until I tried to make my first trade.

Also more instruments have been added to eToro, I need to incorporate them in. But I need some money to do that research, data isn't always free.

But once this research is done, I am likely to use this exclusively on the eToro network.

2nd Target: Macro

I aim to get back to scratch back to a breakeven year at 0% from there I will look to employ All-Weather exclusively.

Risk vs. Effort return

The reason why I am taking this direction is because i am seeing that traders on the eToro network are looking for good returns, i.e. in the ballpark of 10%+ per year. 

The amount of effort and energy required to allow for consistent performance(like how i was trading for the prop firm) is not scalable on the eToro platform. i.e. i can make 1000% with $500 but not with $500,000. The reasons are varied but generally it is non-scable.

10% though is a lot, especially considering where interest rates are at the moment. Can this be achieved with the all-weather, I believe so, but with some leverage. 

The all-weather i meant to be a fire-and-forget strategy because it concentrates on the long-term cycles. While demographics, politics and other factors may influence its performance, most of it will be noise to the strategy. 

It makes for an interesting almost "one-size-fits-all" strategy because it is easy to understand and requires less effort to manage, allowing me to spend my time earning eToro income on the side. 

eToro: Where does it fit in my mission

For those seeking better returns above 5-10% can find other means of improving their returns, but if it is by copying, it requires a certain amount of effort and luck. This not just on the copiers part but the person being copied.

Element of luck is something that I scorn when looking at finance because this is perciesely why i started on eToro in the first place. It is undeniable, but i would like to avoid that element as much as possible.

I started on this eToro journey to help people who do not understand finance, not help those who are willing to put in the work. Help in a nieve manner but a sincere manner. Right now this is as sincere as its gets.

What is effort

The other route of effort, that is something that can be learnt from various sources but requires work. Something most people won't be able to do, and most will blow out. There is a reason why 95% of traders fail.

Most education providers are scam artist (see: https://www.tradingschools.org/), no matter how much you research you are not going to find reliable reviews because so many are incentised via marketing. Trading schools is really the only one I would trust.

Even then, for the highly rated providers expect return less than 20%.

The myth of riches is something that cannot be removed from the image of traders.

So 10% for a copied fire-and-forget fund is actually pretty good. 

What about my high percentage FX trading setup?

I may move my macro FX trading system is still something i believe in and i can still run it. But i will move it to another platform. This is really for my own personal highly leveraged returns, with small amounts, but eToro strength is in its ease of use and social aspects so i will use it for those purposes.

Short idea update: The SPX500 rise continues

I was trading interest rates futures yesterday when the FOMC minutes were going to be released.

It was not outside what I expected. June interest rates were on the table and the taper was going to begin. I sold my VXX position knowing I could lose whatever profits I had at the time. 

And the market rallied.

My thesis continues to hold true but has become even more reflexive. Short-term interest rates are going up and consumer spending I expect to decrease means that the US will have to rely on exports. This cannot happen given the policies put in place.

Credit is already high so increasing credit does not seem feasible for growth.

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The conditions that remain for not having a potential rate hike are as follows:

1) Jobs creations - less than 75k

2) Inflation - more than 2% as per CPE data

3) Growth slow - move into recessionary area

4) Disorderly decline of stock market - more than 10%

If not I expect there to be a continuous hike to the 3% area.

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Short-term rates and interest rates are looking to increase yet we are seeing a stock market rally. There is something wrong here.

Growth expectations are still high, in the last budget launched by Trump we see that there is an indefinite projection of 2-3% growth. This could be why markets are rallying, but it is based on demographics is simply a unicorn. 

Last week's drop in the SPX due to "Trump impeachment" was more likely due to funds flow to Europe. I see this from the market shrugging off the news, spreads on the German Bonds, the strength in Euro, and dollar weakness.

Trump impeachment was probably media hype, although extremely serious.

My position is quite down now and I must be more active on the position now. I will be adding a bit more to my SPX position trying to recoup some of the losses and increase profit if there is a large fall in prices.

USD/TRY Thesis: My most complicated yet least evidenced thesis

****************WARNING: ADVANCED USERS OR OBSERVERS ONLY***************

I heard this possible trade on Real Vision TV on an interview by Michael Harris. My first response was to stay far away from this trade.

Reason? There are the three pillars that define what makes a discretionary macro trader. It is having an edge over 1) information 2) analytics or 3) execution.

If I do not have an advantage in these, I would not have an edge and will not trade.

My initial response to Turkey's issue was that it complex with too many variables. The last time Erdogan went to people, he got 51% of votes. This time he needs exactly 50% which is scary and too close to bet on.

But my recent reading has brought me into the realm of politics. I read a lot so it was luck that my initial view would have changed.

This is my longest post, so I had to cut down some details. But feel free to post on my wall or Twitter if there is something you would like to ask.

 Fundamentals - Part 1: Anatomy of a political player

Investors have been waiting on the sideline for Turkey. Long Term bulls in the country have been disappointed since the Arab Spring incident in 2010. The current state of emergency has not helped.

The recent referendum gives president Erdogan more power.

Any time power moves from the people to the elite few, I am against. Not just from a moral point of view, but is also the underlying basis of credit & business cycles.  So I bet against people who want try to keep power.

But this case may be different, instead, I am finding myself believing that Erdogan may win this. His reign has mixed results unemployment, rising to the highest level since 2010.

But GDP growth rate maintaining above 5% for a good part of his reign.

This screams to me that the Gini coefficient(income gap) must be widening, but there is no information as per World Bank(suspicious?).

Although I cannot confirm this, I am going to assume this is true. Countries suffering a large income gap will be unhappy. This set ups a move towards equalization.

Under the credit & business cycles, the next step is clear. It is usually war, recessions, or a political transference of power.

Here is where the script may not be the same. Erdogan has been using his power to increase his political power.

These factors that convince me to say this are:

 1) Poor/current/bad environment. The people want change.

Erdogan messaging to the people is "I will bring peace" and leaves out how his reign has done so far.

 2) Populism, one strong man who can make a change.

 Erdogan paints himself as the man to do this.

 3) "Us against them" rhetoric.

Recent Erdogan spats against Netherlands and Germany who he claims are "Nazis".

 4) Control of "good" image via media.

The takeover of Turkish media to appear like what Machiavelli calls "Virtuous", alike Putin. See recent movie called Reis

 5) Control of "bad" image.

Jailing of 144 journalists and seized control of more than 150 media companies.

 6) Shaming on making the wrong choice

He uses his influence on his supporters. He tells them "No" voters do not want peace.

 7) Religious bias.

He plays to be the Muslim hero despite the Turkish constitution being a secular state. This country is 99.8% Muslim

To keep this short and digestible I will leave the points at the above.

Source: http://www.politico.eu/article/recep-tayyip-erdogan-pursues-his-plan-for-even-greater-power-turkish-president-akp/

Fundamentals Part 2: How current investors are looking at it?

There may be mispricing because in reality there is a high amount of Media bias.

Erdogan is portrayed as a "bad guy". Focusing on what the Germany/Netherlands incidents and his dictatorship style.

The investment community probably thinks this at this very moment.

But the people interviewed to talk about these trends. Aren't they already outside of Turkey and do not represent the domestic Turkish community. Do we see the same effect of Putin outside of Russia?

There is also low coverage on the issue, most of the world not looking at Erdogan. Keyword searches on "Erdogan" show that few-ish searches have been done.

The last time there was a spike was during the last failed coup and the state of emergency. Remove Germany and Netherlands from recent searches due to spat, that number decreases.

Do investors understand what the domestic economy is thinking? I am not 100% sure. The USD/TRY is not even that well traded.

Michael Harris who was interview on real vision indicated many are short the Lire. Reasoning though but may not be correct in the long-run.

Fundamental Conclusion:

It is easy to pivot this against Russia. One can look at how high approval ratings can exist despite a poor performing economy.

Pivoting bias can ruin our trading.

It is in reading "The Prince" by Niccolò Machiavelli that I saw textbook tactics that Erdogan uses.

His play on the political environment has gained him much power and favour with the people. I can say with high probability he is going to be successful in this referendum.

Technical Analysis

I enjoy Macro trading because there are areas of mispricing. Especially if I assume price is wrong (ala George Soros).

Looking at the USD/TRY which is the only instrument I can use via eToro.

The cross looking back has been nothing but an upward move with no retracements or any other movement other than up to speak of. It is at a very extreme level.

Sentiment Analysis

The initial market reaction may be poor; most investors are outside of Turkey and think of him as a bad guy. 

XM the trading platform has increased margin on the USDTRY due to the expected volatility. Digital look is calling a higher cross if a "yes" vote is achieved. 

But it will likely turn when they realize or the event of the end of a state of emergency happens. One that has been holding the country back.

A stable President with much power, and a beat down economy with many many merits is very attractive.

The population over 80% literate. Many speaking English, French or German, this country's trade has much potential

Public investments in power plants, roads, and oil refineries will further improve prospects. The future looks good for the country.

Entry:

If Erdogan gets the win, I will play this.

If he loses I will sit out.

If the wins follow a positive move in the market, I will take half a position and wait for retracement for next half.

If it moves negative, I will wait for a reversal pattern on the daily chart before entering a full position.

If EU possibility is (finally) taken off the table, market reaction may be bad for a long time. I will wait even longer.

Stop loss levels

This started with the Arab Spring in December 2010 and due to a series of political issues, we are here now. The resistance I see is at 3.80, 3.95 and physiologically a break of 4.10.

A good stop loss is the last high at 3.95 or the 4.10 level.

Take profit levels

A comparable country with Turkey GDP is Indonesia. While different in the investment nature of the two, it is a good proxy since both emerging economies.

It is easy to see how Turkey's Lire(TYR) has suffered since 2010. The Indonesian Rupiah (IDR) has depreciated against USD by about 35% to date. The TYR has depreciated more than 142%

Michael Harris believes that Erdogan will be pro-business. This I also believe is true, the GDP growth evidence of this.

The take-profit will have to be at a level where Turkey was actually stable. Before the coup, we are looking at 2.88 levels a 1:3 risk-reward. If one were to look at before Arab springs, this could be at the 1.42 levels with a 1:8 Risk-Reward.

Given our timeframe for this trade, the former would be a more sensible take-profit area for now but holding for a long period seem inevitable for this cross. Given the high amount of refund though, carry cost is low.

The only disadvantage is the short USD side of this, which is against my long term view. 

That aside though, relative value seems in favour of the Lire.

Conclusion - Cognitive dissonance

There is no doubt Erdogan is not as he paints himself.

He is the only president due to the term limit as a Prime Minister. He is running this referendum because he wants more power.  

He built a 1,150 room (no not a typo) palace for himself. This has no place in a country that is facing high unemployment and in political turmoil.

There are recordings of him asking someone to "hide the money".

The failed coup is clear signs that the country is unhappy and suspects him of not being honest.

He has taken away free speech by jailing journalist and shutting down media.

From a moral point of view, these are not ideals I wish upon anyone.  Yet I cannot deny that this may be growing pains of emerging countries.

·         Do I think this referendum is good for Turkey? No.

·         Do I think Erdogan will be able to settle the country down? Maybe

·         Is Turkey a place that has a potential to grow if politics can be settled? Yes.

·         Is this an attractive trade with good risk:reward metrics? Yes! Yes! And Yes!

Cognitive dissonance is when two parts of a person do not agree with each other. Here my moral and logical sides are at odds. But feelings aside I will invest may invest here.

EURUSD Thesis: Are we forgetting Populism?

The recent moves in the American politics has caused the EURUSD rally.

The dollar strength seen during the initial speculation of the interest rate rise. It then trended downward upon confirmation of the interest rate hike. While this makes very little sense, we can only observe (I have written more on my eToro wall here)

  

But, my thesis is that there is a dollar funding crisis and the Eurozone still faces considerable headwinds.

Fundamental - EU

 I have also been transparent on my blog about my view that the EU will dissolve at some point.

The EU French elections may be a catalyst for this.

I have but a limited understanding of the election. But Marine Le Pen, who is leading the populist movement in France has called EU as "going to die". Needless to say, she is against the EU.

François Fillon of the Republicans and Marine Le Pen of the National Front led in first-round opinion polls between November 2016 and mid-January 2017(source: Wiki). And so I expect the EUR to weaken as fear sets in leading up to April 23.

France is one of the larger economies of the EU, if they leave the EU, this could mark the end of the union.

Consider the birth of the EU was due to Margret Thatcher and the Single Market Agreement (SMA). And now Britain is leaving.

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Fundamental - US Dollar

The US dollar has been suffering at the failed passing of the healthcare bill

Look at how the SPX500 recovered from the initial dips.  The recent move in many markets may have been exagerated.

If this is true, a recovery is imminent.

I have also written a little about my US dollar strength thesis here and while I do have a few more reasons, I do not see any reason to think otherwise.

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Technical entry

The fundamentals usually get me more excited. But for this trade, the technical prove more interesting.

The DXY (or $USDollar on eToro) index has reached an important support level. A break up here would indicate we are likely to headed higher.

For the EURUSD, the 4hr chart formed a shooting star candle pattern with a bear candle following it. Another sign we are going lower.

Even with all these confirmation I will only enter this position after I see considerable consolidation. A retracement and 3 candles below the 10EMA would also be a good entry for me.

Given the risk: reward, i can afford to be patient here.

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Sentiment

Sentiment for today, especially during the Asian trading sessions has been all about the failed passing of the bill.

However, Article 50 execution is expected on Wednesday. From there we are likely going to see a change in sentiment.

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Entries

I suspect after article 50, there will be a start of a correction. I may be wrong here, and is why i prefer to wait for a consolidation to ensure that this EURUSD bull run is over.

Possible Exits

Whether of not  Marine Le Pen wins is not of great consideration to me. (but I think she will) There are too many variables to predict.

Even if I did, I wouldn't know how the market would react. It could happen like the Trump rally or it could fall. I plan on exiting at least half the position before the results, especially if we are in profits.

If the market moves away from the EUR in fear of the EU dissolving, we will test this the 1.04 levels again.

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Summary:

Short EURUSD.

Sentiment has moved to the US after the whole healthcare bill taking full view of the market.

The EU troubles have flown under the radar, but i expect it to be the centre of attention till the French elections.

This presents an intersting risk: reward for a short.

The entries and exits are not 100% clear at the moment, but i am watching out for it.

Loss $$$ but gained so much more

I sold my gold position because Trump was “done with negotiations” and I felt this was a clear sign that the health bill was going to go through. But it did not.

I also closed the position also because I see a potential opportunity on the EURUSD. Due to correlation risk, I did not want to have the two correlated trades open.

I write this post because I am happy. The bill was not passed through, democracy has done its part in the American system. I have become opposed the bill and have become emotionally invested to the outcome.

 The Trump campaign has called Obama-care a disaster due to its cost and lack of coverage. He has promised his bill to be better. 

The bill was so bad,  analysts called it 'Dead On Arrival' the fact that it has reached this stage is crazy. If politicians behaved in POTUS interest, the bill could have passed as the Republicans have the majority.

The fact that they cannot pass this bill means people's interests protected. This makes me very very very happy.

I may have lost some money here, but democracy and the people's interest won.

Trump is having problems. This may be the start of the stock market crash/correction I have been expecting but it is too early to tell. 

Dealing with a losing position - The SP500 & Horses

Now I have a position that is open, it is not very big but it is still part of what I believe is part of a bubble.

I have talked about the reasons at length and why I think it is a bubble(please see here) and since then have developed more evidence to support why it is a bubble and little evidence that it is not. For e.g. 8 presidents of the US has come after a two-term president. 7 of them experienced a recession in the year following their election, Donald Trump is number 8.

I know gurus such as Druckenmiller and Ichan are long in the market but yet others such as Soros are short.

But I am holding a short position in the SP500, and down quite badly, slightly over 1% of my account.

Recovery here would mean averaging down, but more than my initial holding amount. Essentially doubling down on a losing bet to hope it recovers. This specific strategy is called martingale, a term that shares a term with horse riding.

Source: https://angusbarrett.com.au/complete-german-martingale-4866 

***********************WARNING***************************

I have to caution, there are many people who use martingale mainly because they do not wish to be wrong, or to be seen as wrong, or do not like to sell losers(prospect theory) especially on eToro. This is super dangerous because when they lose big, they lose everything.

I find this kind of trading is irresponsible if it is blind.

If you are copying someone using this, be aware that it will be like a Turkey effect. Everything will be fine and dandy for 364 days a year, and that one Christmas day. Well...

****************************************

But i do not mind employing it here because one of the marks of a good macro trader is to know when to call it quits and when to recognize it is an even better opportunity. For me, this is a better opportunity.

Using this is merely recovering some of the position, even if it turns against me, that is fine because i do not mind being down double this position.

Looking back at the SP500, each successive high was met with a retracement at least to the 38.2% mark. Using the martingale, i will try to recover the position in full and immediately reenter the trade so my exposure is still similar to what i initially bet on.

In math terms where "x" equal initial entry size

1x - - - > Enter additional Position, of 1x + 1.6x = 2.6x

Sell 2.6A when P&L = $0

Re-enter immediately with 1x

I can exit completely and move on, or i could re-enter at a later time, but i am doing this so i can constantly be exposed to the market and not lose out if my timing is off.

Can I just close 1.6A instead of closing everything, Yes i can, but i am doing this because transaction costs are minimal and exposure can be better managed this way. In other words, its easier for me to math.

If i were to enter current levels now it would look something like this:

	Trade Size (total)	Open Price	Current
Level 1	8.80	2268.7600	2,311.1231	19,965.09
			New Value	20,337.88
			P&L	-372.80
Level 2	14.08	2,337.6000	2,311.1231	32,913.41
			New Value	32,540.61
			P&L	372.80

While Breakeven is going to be somewhere around 2311 levels above the 38.2% fib retracement levels. i will not be upset if it trends higher following that.

For now, i have to wait for consolidation to make my entry, no telling how much more this rally will persist.

eToro-ing Strategies: Part 3 - Backtested Results

For those of you who prefer videos, i have done a series on my YouTube channel here (insert

Link

)

This is not supposed to be detailed instructional into All-Weather, it is too complex for me to describe here and my YouTube videos but i hope it is general enough for my copiers so you do not need a finance degree to understand.

I will probably do a Udemy course to describe the methods in more details, but this is a general overview.

Past results are by no means a reflection of future returns.

But......

i believe in the spirit of the system and human behaviour, the results below are from my back-tested results.

Testing Results

The extreme returns are a result of exposure to real estate in the US, so the gain in 2010 and low returns in 2009 are unlikely to repeat. The loss in 2005 is just an organic under-performance of the system and was partially due to it only being restricted to half a year.

These results are also restricted by the number of years in which the instruments had data.

In view of this, i am reducing the exposure to the Real Estate ETF as well as reducing exposure to the SP500 due to my long term view of this market.

My value add

With the information you have here, you can use this system? Absolutely. If/when i come up with the Udemy course, this will be even more so.

My only value add is

1) i have a macro view of the market,

2) i manage the technical aspect,

3) i understand this portfolio as best i can and

4) that i rebalance this portfolio every quarter. These are elements you can do yourself if you feel up for it!

I hope my intentions are clear and that this portfolio is something that you can add to your investing journey. If not thanks for taking the time to read this and hope you have learnt something!

eToro AUS Capital Limited AFSL 491139. eToro is a multi-asset investment platform. The value of your investments may go up or down. Your capital is at risk.

eToro-ing Strategies: Part 0.5 - My intentions

For those of you who prefer videos, i have done a series on my YouTube channel here (insert

Link

)

This is not supposed to be detailed instructional into All-Weather, it is too complex for me to describe here and my YouTube videos but i hope it is general enough for my copiers so you do not need a finance degree to understand.

I will likely do a Udemy course to help describe the methods in more details, but this is a general overview.

______________________________________________________________

First to my copiers and followers: Thank you for following me on my journey.

As much as i have enjoyed being a "full-time" trader, returns have been lumpy, (December lost 1+%, mid-January +0.05%) and given the period we have entered, I think we will be entering a period of extended consolidation.

This likely mean i will not be able to trade 1) responsibly and 2) in good conscious.

Why this system?

Only 2 schools of thought have consistently returned good amount of profits

- Global Macro (Soros, Dalio, Druckenmiller, Rogers)

- Micro/Value investing (Buffet, Munger, Pabrai)

As much as people say they have been profitable, a study of the wider universe will show this to be mostly true.

My chosen field has been Macro and I have studied the above-mentioned traders.

This is an application of Dalio's methods

http://news.efinancialcareers.com/wp-content/uploads/Global-macro-trading_djvstock_iStock_Thinkstock.jpg

So why have i not employed this earlier?

Two reasons

1) I have enjoyed employing/studying the reflexive process as this is a more exciting way to look at the world. It is also more lucrative but extremely lumpy.

2) Instruments available now are different from one year ago. The All-Weather system requires certain expression via certain instruments, one year ago before ETFs on eToro, this was impossible. Now we have a not ideal but workable system.

Am i giving up?

Please do not mistaken this as a means of giving up on the 1-year journey. There are ways of trading which i can make about ~30% a year in most trading conditions but lose everything once every 7-8 years.

I have used methods like this before and is VERY VERY common on eToro. I used to earn an average of 7% a month for about 2 years.

But my experience shortly after was similar to a pattern that i saw when i was doing my Masters thesis, you will lose a significant portion of your account (30-80%) after if you keep going down that road.

I have long decided that this is irresponsible and if copiers do not understand this process, you expose them to a chance of earning 30% with the possibility of losing 30%-80%. And most copiers who do not trade themselves will not understand these risk nor want to accept these risks.

_______________________________

Conclusion

I am not making excuses with my one year challenge, I knew that there will be periods where i would not make money and that returns might be lumpy in maybe 10% of conditions. I was hoping the market would play out in the 90% area. But as the world would have it, we are in the 10%.

You can quantify this but the extended ranginess we are in.

One objective that i have is to be around on eToro for a very long time but given my current circumstances, it is better for both myself and my copiers if i spend 4 hours a day employing this system and work some hours instead of stressing every moment waiting for the next trade.

This is a better way to show my trading "abilities".

eToro AUS Capital Limited AFSL 491139. eToro is a multi-asset invest ment platform. The value of your investments may go up or down. Your capital is at risk.

eToro-ing strategies: Part 2 - Modifcations and Expression on eToro

For those of you who prefer videos, i have done a series on my YouTube channel here (insert

Link

)

This is not supposed to be detailed instructional into All-Weather, it is too complex for me to describe here and my YouTube videos but i hope it is general enough for my copiers so you do not need a finance degree to understand.

I will likely do a Udemy course to describe the methods in more details, but this is a general overview.

________________________________________________

My replication on eToro is probably a poor way of doing it, but it is what we have as certain expressions via certain instruments are just not available.

If you were to follow what was described in Tony Robbins book, Intermediate Government bonds are not available via eToro.

Instead i can only keep the spirit of the All-Weather.

Modifications

http://2.bp.blogspot.com/-cBxzwNheouM/UAiYQfq0ZoI/AAAAAAAAAE4/1C6ciaFAolc/s1600/car+modification1.jpg

I have a liquidity preference and i believe CFDs to be more liquid, i may be wrong here, but it is my belief for now.

Risk parity will change consistently and i have adopted the volatility per day for the last 12 years as a starting point. But risk allocation will be

re-balanced

 and changed depending on my market outlook.

Also in my study of reflexivity and the self-reinforcing cycles, i have added a super simple technical analysis system to try and direct our allocations towards long term self-reinforcing trends. The 200 Simple Moving Average.

Because we are not dealing with currencies, i imagine this to work slightly better in the instruments expressed.

Instruments used

As mentioned above, i do not have access to all the instruments in question via the platform so some improvisation was done.

For instance, the TLT is the long term treasury ETF.

The corporate bond index includes a broad range of

duration

, because our expression of this requires short & medium term bonds as well as corporate credit, i have to take a short position on the TLT to remove large effects of long term treasuries within the corporate ETF.

This is not ideal, but it is the best expression that we have.

eToro AUS Capital Limited AFSL 491139. eToro is a multi-asset invest ment platform. The value of your investments may go up or down. Your capital is at risk.

eToro-ing the world's largest Hedge Fund: Part 1 - Technical Introduction

For those of you who prefer videos, i have done a series on my YouTube channel here (insert Link)

This is not supposed to be detailed instructional into All-Weather, it is too complex for me to describe here and my YouTube videos but i hope it is general enough for my copiers so you do not need a finance degree to understand.

I will likely do a Udemy course to help describe the methods in more details, but this is a general overview.

________________________________________________

Only 2 schools of thought have consistently returned good amount of profits

- Global Macro (Soros, Dalio, Druckenmiller, Rogers)

- Micro/Value investing (Buffet, Munger, Pabrai)

This is an application of Dalio's methods.

This is no secret as Dalio has always been transparent to a very high degree, and he was kind enough to offer an allocation strategy in Tony Robbins book, Money Master the Game.

It involves two important aspects

4 seasons

No not the hotel!

Every economic enviroment can be descibed in 4 seasons.

1.      High Inflation, High Growth

2.      Low Inflation, High Growth

3.      High Inflation, Low Growth

4.      Low Inflation, Low Growth

In any season certain assets will perform well and certain will not.

^{Source: http://www.wallstreetoasis.com/blog/all-weather-ray-dalios-approach-to-the-ultimate-investment-case-study}

Here a graphic of what Dalio proposes.

So if one were to own assets equally, it should be theoretically possible to return in most economic environments and those that you lose it is not too bad.

E.g. when times are Low Inflation, Low Growth. Times are bad, equities are down, the market is cranky. Long Term Treasury bonds and Gold performs well cause no one wants to take risk and rather have a "safe" environment.

2) Risk Parity

The second theoretical part you need to understand is that risk is different per asset.

For instance,

- Google Stocks in Jan 2006 @ $235. Now $832

- 250% increase in 10 years

- 25% Per Year

- 10 year bond in Jan 2006 – Yield 4.30%

- 4.30% per year

This makes sense because bonds have lower risk. But what happens if i borrow money or lever the bonds up say 5x? This will change 10 year bonds return to 21+% a year.

Yes, leveraging increases risk but that is the point of risk parity, changing allocation to match the risk: return ratio for each instrument. 

Review 2016 - I was once a (pure) copier

Especially to copiers/investors and followers,

Thank you!

I wanted to start this letter by thanking those of you who have been copying / following me on this journey, regardless if you have seen my vlogs on YouTube, you felt my joy and frustration from following me on my eToro wall or because you read my thesis(es) on my website.

Regardless, my eToro 2016 journey has been bumpy and ended not how i would have wanted, seeing my short USDJPY thesis fail.

Ultimately though, I am super thankful for the opportunity eToro has given me. To be able to transparently communicate my philosophy of trading, one that is not founded in short-term expectations & greed but looks at a sustained horizon. To explain this philosophy in full, I would literally need to write it a book, till then I am calling it the "Huzza-equilibrium of return” or something like that.

My "Huzza-equilibrium" will need something like 12 years to prove in full. But for now let’s recap the beginning of this journey, April 2016.

Above: Cheers from my wife and I (not sponsored by Boost)

          

Review 2016

I was once a Copier

Some of you may not know this, but when I first started out on eToro, my goal was to copy other people. I knew from losing a lot of money that trying to trade while holding a full time job was very difficult.

We all have our individual work stresses going on, not to mention wife, church, family, gym. Trading was just too impractical and draining to do after work.

But we are told, if we don't put in the work, we can't get more money. So how can we put our money to work? We all know from books that we can't trust our financial advisers who are all only out for our money and not our long term well-being. With so many things to do with our lives, finance should not be one of those things where we stress out so much over. Yet 31% of married couples report money as a source of conflict!

Along came eToro. A platform that aligns our interest with our fund manager because they treat our money as how they would treat theirs. So I was on-board, I put some money in and tried copying other people. 

One Year Challenge

Ultimately I found that there were things I liked and things I HATED. So around June I stopped copying completely and decided to commit to this Full-Time, joined the popular investor program and embarked on my 1 Year challenge, to live off of profits from eToro for 1 year.

I even went from being a 4hr chart trader only, to a part 4hr and part 15 min chart trader, to a full 15 min super short term trader!

In October, I became a Cadet Popular Investor. At the time of writing (15 December 2016), I have about 201 copiers, 3,736 followers and US$78k AUM. And I thank you all so much for joining me along this journey!

It has not been easy, a few times I wanted to give up and go back to getting a regular job as not having a steady paycheck with a "comparatively" small amount of capital & risk is difficult.

But I imagine changing the world of Finance and making it easier and for the betterment of even 10 people. And that motivates me to continue on this journey.

Trading Thesis 2017

Most reports like these give economic Outlooks, which tend to be very vague. So instead here are an updates on what I will be trading.

USDJPY Thesis

I will be retiring the USDJPY thesis. Even though it has been the cornerstone of my investment performance over the months, it has reached a point whereby i believe fundamentally it will no longer have a large favorable risk symmetry. The Japanese Fiscal & monetary pressures have therefore run its due course. Unless it retraces back to the 108 level, we will not revisit this.

The next question is, will Japan default?

I would like to trade this, but the appropriate instruments to express this view are options and Credit Default Swaps (CDS), which are complicated and not available via the eToro platform. So we will stop at that.

GBPUSD Thesis

Our GBPUSD thesis will continue to be in play. The GBPUSD, like all currency pairs, runs on the mechanics of demand and supply.

Depending primarily on the outcome of Brexit and its terms, these two variables are unclear. The potential impact of Brexit may actually be close(although unlikely) to negligible. Especially given the comments that the UK will still "pay for favourable terms within the EU"

But for the moment, Theresa May is still fighting Article 50 and economic indicators plus the recent Autumn paper have been quite sanguine about the outlook of the UK.

My initial thesis compares the position of UK vis-a-vis the position of the US at the same point in the 1970s where the cross was this low, the thesis continues to hold. Retiring of the thesis will depend on 1) receive clarity on terms of Brexit or 2) economic paradigm shifts for either country.

Upcoming Thesis(es)

New thesis in the pipeline including, Gold, USDCAD and AUDUSD. All of which are heavily commodity related.

Depending on correlation bias between the 3 theses, I may only launch one or two. More updates on my blog soon.

Goals 2017 

The aim is 20 - 24% return, mainly because this is what i required of me to live off. While i do hope to get more, putting targets on what the market should or should not give is not healthy.

What would be healthier is prioritizing capital preservation over returns, and that is what I promise I will definitely be doing.

Learning

I love practicing martial arts and knowing you are never complete is part of the journey. This year, I have completed what is necessary for Master’s in Science(Finance), read conservatively 40 books and listened to over 100 finace related podcast episodes (go listen to “@twoblokestrading” They are part of the eToro community!). Yet I feel like I have barely scratched the surface of what Finance truly is, I hope to continue to learn and evolve for 2017.

Above: Handing in my Masters thesis

Other Targets

• Specifically, for those who have been copying me, I hope to come up with a Udemy course by end 1H2017. There is too much information out in the world, and I hope to filter and condense information to give you a framework for finance as a whole. 
• Continue to vlog on YouTube and maybe start a Facebook page.
•  I would also like to do some marketing of the eToro brand, but tangibly i have not quite reached an idea as yet. But I will have to set some targets on that soon.
• I would like to achieve Elite Popular Investor status, but i rather let the community decide if i am worthy of the title. Hence it is not a goal specifically.

Special Thanks  

•           To God, for giving me all things and everything!

•           To my copilot in life, my wife Nicole thank you for loving me for who I am, always encouraging, and being super supportive with me on this journey. I know what I do is confusing, but thanks for trying to listen anyway.

•           To my mom & brother for never giving up despite so many shortcomings, and thank you never ending patience, love & support.

•           Todd, my performance coach, for keeping me sharp when times are bad.

•           Boulos Shakkour for being a great account manager, encouraging me to join the PI Program, and making my life easier.

•           To Annie Charalambous and the eToro popular investor team, thank you support and guidance.

•           And to Yoni Assia, thank you for creating this marvelous community!

Finally  

So here's to love of making the financial markets a better place….

                                    To transparency and honesty in all we do…

                                                           …..but most of all, here is to loving each other as we love ourselves!

Raise your glasses to embracing a new honest world of finance and here is to a successful 2017.

God Bless!

@FundManagerZech

www.zechz.com

Youtube: FundManagerZech 

Oil Update & The Unfair Advantage

Hi all,

I am at heart and by training and circumstances am a technical analyst.

     - When i first picked up trading, this was what i learnt,

- for the first few years of trading this is what i used,

       - most books that i have read preach technicals

- when i was working part-time for a fund, it was based on technicals.

 Credits: https://www.colourbox.com/image/young-man-showing-poker-cards-image-4253145

In trying to find a way to trade oil, i ultimately found out the technicals did not hold in certain periods (e.g. Jan - Mid Feb 2016).

The recent Trump victory scenario is one period where technicals and fundamentals did not apply and some traders lost money (including myself). Yet as eToro traders we have one thing that gives us an advantage over all hedge funds and mutual funds out there.

The ability to walk away and not play the game.

I liken this to playing poker, if we have a bad hand instead of folding or staying or whatever, we can just walk away. If you are a large fund manager, it is difficult to liquidate large positions without adversely affecting your portfolio, transaction costs, move the market, scare your brokers, not to mention regulations and things like that.

But for us, if we have a bad hand, we walk. We do not need to keep positions open, nor do we need to have capital invested at all times.

We do not have a liquidity problem or have issues entering or exiting the market.

Many of you know i was thinking of entering the oil trade, but i have decided not to. The OPEC meeting looking back at the past few months is nothing better than a coin flip with reasons no more compelling than the last. So while my thesis holds true, and i believe in it, without having someone who specialises in oil giving this a review i will not pretend to fully understand all the powers at work. 

Maybe next week once speculation has died down. But in the meantime, I am walking away from the poker table.

______________________________________________________________________

Trading Trump Part 1 - Financials

Summary:

- Short Financial stocks, selected, only JPM at the moment

- Look for breakout

There was a good amount of movement in the Spider (Trader talk for the SPX500) during the election period. The initial price factored into the market was initially for a Hillary win, proceeded by the market selling off in fears of Trump winning, proceeded by a rally to an all-time high after the Trump indeed did win, erasing all fears of the Trump win.

To this effect, does the recent movement post-election make any sense? It is hard to say.

Looking at the spider for a broad view of the sentiment of the market might not be the most accurate given that it is a market weighted average http://www.investopedia.com/terms/p/priceweightedindex.asp) index and is weighted more heavily to the bigger companies.

Another way to take one step deeper is to look at the heat map (as seen below), this breakdown the various sectors and gives us a good look at the sectors that have benefited from this election.

Part 1 Financials - Overall Short position but not willing to risk

Repeal the Dodd-Frank and Jamie Dimon was considered for the post of the FED chairperson. This caused an understandable rally in the financial stocks.

However, after reading the book "Makers and Takers" & "Why We Want You to Be Rich: Two Men, One Message" plus watching some of Donald Trump's interviews, this may really be a question of credit availability to the regular man in the street.

Dodd-Frank was designed to reduce the risky lending practices that use to exist, I believe Trump, coming from a real estate background sees this as a bad thing because he sees first hand in his business the freeze in credit to the regular joe. This was elaborated in one of his older interviews with Pierce Morgan, he said he does not understand why people with actual income cannot get a proper loan.

Therefore it is important for us to differentiate the two aspects of Dodd-Frank

1) Relaxing the credit structure and requirements to reduce risky lending

2) Reduce the financialization of assets, this is in the realm where derivatives lie and where the Mortgage Backed Securities were birthed from.

One such crazy example of this financialization is not allowing the banks to speculate or hold on to metals like aluminum. There is this huge issue where JP morgan held so much that a report emerged alleging JP Morgan Chase & Co. owned over half of the aluminum traded on the London Metal Exchange

All this to make money. This affected companies such as Coke and Pepsi who actually require these raw materials for which were being speculated on.

Will Trump dismantle Dodd-Frank to this point? Unlikely. One of his first marketing points for his campaign was that he was not in involved with the large banks. Unlike Hillary.

Given this scenario, share prices may have rallied erroneously to reflect an expected increase in derivative income.

While there will be an increase in loan income, it is best then to look at banks with a differential between loan and derivative income to best reflect this thesis.

Looking at the Comptroller of the Currency report on Derivatives, JPM seems to have benefited the most in the last quarter from Derivatives making a total of US$2.8 bil in 2Q2016 in relation to net income reported by the bank' total Net income applicable to common stockholders at $5.7 bil (representing over half of possible income).

It is easy to see why the expected increase in derivative income would have such a significant effect.

Unless we see a significant increase in commercial banking lending as well as consumer & community target, this coupled with increasing yields, it is unlikely for JPM to return the increased relative P/E expected of this spike in price. 

Target: JPM a minimum reversion back to initial pre-election prices, at $67.70, a $9 correction over today's price.

Thesis likely to be realized on clarification of the Dodd-Frank or earning announcement reports.

The game is rigged. Sorta!

It's truly amazing how things worked out. I left my position open last night due to Japanese numbers and a sense that market would move upwards. Closing the trade at the high would have made me about $200

It did, so i went back to sleep.

But when i woke up, i saw the notification on my phone that i hit my Stop Loss, this TRULY AMAZING pin bar as seen in the photo hit my stop levels. Not only did it hit, it went slightly below (closed at +$30 instead of +$50). After went that merry way back up.

To all the new traders out there. It happens, short-term traders are exposed to the big market makers in the industry. (Read the book
"Beat the Forex Dealer: An Insider's Look Into Trading Today's Foreign Exchange" by Agustin Silvani))

One of the benefits of trading with Etoro is it is a Level 2 ECN clearing system so the terrible broker problems like this much reduced (to all the haters! please stop complaining about the spreads, it is a worthwhile payoff!). But things can still happen when you play with the larger market. Pins like this is really the big boys taking your lunch money pushing prices down to hit you where there is a volume of stops.

This is one of the reasons why short-term trading is hard, even when you make the right call, it does not always work out, market sentiment, bigger players then you etc. 

It is like the system is rigged.

But this is why i love the market! Knowing the pitfalls, the intricacies, and all the problems but still taking it head on where others give up.

Stay safe people!

Being Honest: Its not Enough

Honesty

My goals for Etoro have changed. My singular focus of this trading account is to provide monthly income, and in doing so, help others achieve financial freedom.

Since I have joined the popular investor program, I promise, to be honest, and transparent.

With that said.

It is NOT good enough

The past 2 months the USDJPY system has been great for me! Till last week where my system didn't return anything for a week. And it lost me some money today.

So reality check, it is not enough for my goals of monthly income. I do not have all the answers and do not know everything there is to know.

I need to get better.

Dirty Secret of the industry

As a partial academic (I am perusing my masters in Finance), my understanding is different from most people when it comes to selecting managers.

Warren Buffet says it best (full article here):

Buffett begins by imagining a nationwide coin-flipping contest. Everyone in the country participates and calls the flip of a coin. Call correctly and move on to the next round, guess wrong and you're out.

After 20 days, about 215 lucky flippers will have correctly called 20 consecutive flips. They gloat in success, yet the nature of coin-flipping tells us they're just lucky. It's a game of random chance.

But what if all 215 flippers lived in the same town? What if they all hailed from the same school? The same fraternity? Then we'd get excited. The laws of probability suggest 215 winners after 20 days. But those same laws tell us that if all 215 belonged to an associated group, that almost certainly wouldn't be the product of random chance. These 215 flippers clearly would know something we don't.

The real flippers in Buffett speech are nine "superinvestors" -- himself included. All nine crushed the market averages over multiyear periods by between 8% and 22% per year.

In a world with millions of investors, such returns can occur by sheer luck -- just like the 215 coin-flippers appeared at first glance. But all nine superinvestors hailed from the investment school of Benjamin Graham and David Dodd -- Columbia professors now known as the fathers of value investing. That meant something big. It meant that their success wasn't the product of luck. It almost had to be attributable to the only common link they shared: the investing philosophy learned from Graham and Dodd. The "intellectual origin," as Buffett put it.

Credit: Photospin

Learning from the best:

I echo these thoughts and want to be part of the superinvestors. I have thus dedicated the basis of my trading on the best Macro traders and thinkers of our time and all of my systems have been based on these concepts.

Ray Dalio - Credit Cycle

Nassim Nicholas Taleb - failure of bell curve statistics and asymmetrical risk

Michael Marcus - Trinity of trades (Fundamentals, technical and sentiment)

George Soros - reflexivity

But for my 3 systems at the moment, they have to change because it isn't good enough to reach the goals.

I will choose hold on to nothing if it does not benefit this goal. And unfortunately, this includes my beloved 4hr system which has not failed me since I was doing my undergrad.

Rigorous Testing

Copiers and followers, do please know I do test my methods before applying and never risk capital to test anything. It either works or it does not.

I do not believe in eyeballing charts either, IT DOESN'T WORK! So anyone showing you past data with the benefit of knowing future movement. Like so many YouTube gurus. So please take it with a pinch of salt.

I have my own way of testing and if you would like to hear more, drop me a comment or write on my Etoro feed and I might do a blog post on it.

Stay safe people!

I love etoro: News Confusion and Interpretation

The headlines on the front page of the

Wall Street Journal

, front and center, read "Yellen Sends Strong Signal on Rates."

The Financial Times reported

, "Gold bugs initially breathed a sigh of relief after Fed chair Janet Yellen said the argument for a rate rise had 'strengthened' but stopped short of signaling that a move could come in September

Fed vice-chairman Stanley Fischer, who was interviewed on

CNBC

soon after the speech, played the interpreter role. Mr. Fischer made "some bullish remarks on the US economy" and then said that "Ms. Yellen's remarks were consistent with the possibility of a rate rise as early as next month."

These are the news sources, pay close attention, remember the markets make little sense and hindsight is 20/20. I was discussing this with a friend who does Options for a very large bank in Singapore.

For simplicity I shall use the USDJPY, as I am in it, as a proxy for our discussion. We were agreeing over the initial movement of the USDJPY market was correct from an academic economics perspective.

However, the market shortly reversed. The following day, I had another conversation with someone else on how the upward movement was academically correct given the circumstances.

So who is correct? The answer is not clear, nor black or white. A couple of students who study Finance is not a good proxy, neither are the popular news outlets WSJ, BT and CNBC.

When it comes to life, I end arguments on how the market should react with a lot of people with a simple statement. If you know the market, why don't you trade? After all smart, high profile traders such as Bill Gross use economic conditions and their track record shows what they are talking about.

Etoro makes a lot of sense because no matter what someone says, the proof is in their trading.

eToro AUS Capital Limited AFSL 491139. eToro is a multi-asset investment platform. The value of your investments may go up or down. Your capital is at risk.

Stay safe people!