Currency Kings

How Billionaire Traders Made their Fortune Trading Forex and How You Can Too

BEN ROBSON

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Book Details

Price	3.00
Pages	263 p
File Size	3,232 KB
File Type	PDF format
ISBN	978-1-25986301-1
Copyright©	2017 by McGraw-Hill Education

Introduction

I have been lucky enough to be involved in the forex (FX) market for more

than 20 years. I say lucky because I have always found the market fascinating,

dynamic, and often exhilarating. It is a massive market—some $5.3 trillion in

FX transactions is traded each day. The market ebbs, it flows, and then in an

instant, it can spike and retrace or continue to move in truly Brownian fashion.

There are so many factors that may influence a pair of currencies, and there are

thousands of traders pitching their wits (and cash) in the relentless pursuit of

profits and perhaps perfection.

There are some who argue that luck plays a great part in the success or

failure of any particular trader or philosophy. There are several theories that

support this contention. And it is perhaps applicable to the vast majority of FX

participants. But there is a breed of traders who reject this generalization and

quite rightly base their educated, risk-adjusted wagers on something a bit more

certain than luck. Some of these people either are already Currency Kings or are

on the right track to become future Currency Kings.

If I were to fully define what I mean by a Currency King, it would be an

individual who has made multimillions or billions in the FX marketplace by

scaling up a legitimate competitive advantage. The marketplace in my mind

encompasses spot, futures, forwards, and options as products and also

technology and innovation as a means to access and penetrate the market either

in a trading capacity or as an enabler of trading. The traders, speculators, market

makers, and technology providers you will read about have all made fortunes in

the FX marketplace, and some are integral to the market as it is today.

Going back through my 20-plus years as a foreign exchange dealer and

trader, there are people, places, and events that have led me to believe that

markets can be beaten. In a transactional sense, wealth is transferred from A to B

and markets are efficient, as Professor Eugene Fama and his “efficient market

hypothesis” suggests. But there are many instances when markets are inefficient

or predictable to a degree, where the odds of a payoff are not equal and therefore

favor one particular outcome over another, and there are traders out there who

consistently beat the odds. I have witnessed this, and it has inspired me.

From my very early days at Goldman Sachs, I found the energy of the

establishment and the people phenomenal. Goldman Sachs has some of the very

largest and most successful hedge funds trading through its market making desks

—in effect, these are super smart people executing colossal orders for super

smart people. Without doubt, in my mind, some of these funds had compelling

competitive advantages, and for many the competitive advantage was accessed

through the simple principle of hard work. Some of the global macro funds

employed exceptionally intelligent people to do their research. It may be a

simple analogy, but a concert pianist doesn’t become a concert pianist without

spending many hours a day plying his or her trade. Similarly, to get a sniff of

being a top global macro hedge fund trader, one needs, among other things,

intelligence, dedication, and application, not to mention some of the other

significant qualities such as courage, tenacity, and discipline.

During my time at Prudential Bache, I encountered other types of traders—

no less fascinating than the global macro funds that traded through Goldman’s

books—and these were trend following commodity trading advisors (CTAs).

What struck me about CTAs—of which there were many—was how aligned in

direction and frequency their trading was. Some days, there would be very little

activity, and then on others it was one-way traffic all day long. It led me to

conclude that many of the “black box” programs were remarkably similar. What

also struck me was that on those busy days, the market tended to “go with the

flow.” Hence many dealing desks had what is termed “flow traders” whose role

was to follow some of the “directional” FX flows.

The late 1990s and the early 2000s saw the arrival of many online market

makers and the beginnings of “retail” FX trading. This allowed many smaller

customers to access the FX market through small brokers. The unfortunate

statistic for retail traders is that about 80 percent of them lose money. My

experience working at CMC Markets in Hong Kong would probably suggest that

the winning percentage was slightly higher, but that was due mainly to the fact

of leverage restrictions imposed by the Hong Kong regulator. What CMC

Markets and many other retail brokers did, especially in their early years, was

take the opposite side to many retail clients’ trades. In some instances, positions

could become quite large, and so the strategy was not without risk. Those who

take risks are often rewarded, which was the case for CMC.

As the retail trading fraternity grew, and regulators became more aware of

As the retail trading fraternity grew, and regulators became more aware of

small brokers taking on large FX risks, the practice of straight-through processes

(or agency brokering) became the modus operandi of many retail brokerages.

Brokers would simply take a spread or commission as the trade passed “straight

through” to a bank. It turned out to be a positive evolution in the market as banks

would fight to be “top of book” (in other words, to offer the best executable bid

or offer price) in aggregated liquidity pools and distribute their liquidity through

retail brokers and electronic communication networks to end clients.

The reward for the banks was to warehouse the risk in greater scale than their

retail counterparts. Bigger balance sheets equated to more risk taking. If a bank

could supply pricing to several retail brokerages, it could collect the trades and

therefore potentially collect the 80 percent of losing trades. The natural

progression of this evolution was for non-bank market makers and ultimately

high-frequency traders to join the bandwagon and fight to provide top-of-book

liquidity to retail brokerages. In the case of HFTs, however, in many cases the

strategy was to be a maker and taker of liquidity, often capitalizing on pricing

latency between two counterparties to make nearly instantaneous profits. In the

zero-sum game of FX, huge fortunes were made by these three distinct types of

brokers and market makers, some of whom listed on worldwide stock exchanges

on the back of this trade. Retail traders were the losers of course.

Continuous advancements in technology and innovation have been at the

forefront of the FX market for the last two decades. Computer power has in

many respects replaced brain power and sleight of hand. In an arena heavily

influenced by HFTs, millions of orders can be placed (and canceled) in

millionths of a second, and computers are so powerful and rapid that one could

argue that markets are in fact nowadays practically efficient. And yet, there are

still avenues for arbitragers without supercomputers to make money. Finding a

legitimate competitive advantage may be tougher these days, but it can still be

done. Smart people will always find a way to make money.

My own experience as a proprietary trader led me to establish four basic

principles that I believe lead to trading success. These are covered in the first

chapter, but put very simply, they involve doing some detailed work on your

trading philosophy, working out whether you have a legitimate competitive

advantage, and seeing whether you can scale it up while constantly being aware

of your risks.

As an example, I will cite an arbitrage trading business I ran out of

Singapore and Dubai. My team and I had worked out that there were some

forward pricing anomalies in certain currency pairs. Our competitive advantage

was that we had some very good banking relationships and received superlative

pricing from our banks. Our challenge was to maintain both the banking

relationships and pricing and at the same time take advantage of pricing

inefficiencies. We had two of the four ingredients to create a highly profitable

trading business. It was scalable up to a point, and the risks were limited to our

counterparties, which were mitigated by using a prime broker. It turned out to be

a very successful venture—but not enough to make us Currency Kings. Scale

was the limiting factor. On another eminently scalable arbitrage, our firm lacked

the capital to support the trade to any large degree. The point I wish to make

here is that we found opportunities to make money, and there are still

opportunities today.

I am convinced that if you have the four basic principles stacked in your

favor, you can make outsize trading returns. You do not have to be the smartest

kid on the block either, as many great currency traders have only a very basic

education. There are plenty of traits that quality traders exhibit that can easily be

learned. Others will come with application. Trading discipline is perhaps one of

the key concepts that define whether you will be successful over the longer term.

My goal in this book is to give examples of traders, products, and ways in

which you can make money in the FX marketplace, point out the many obstacles

that you will face in your pursuit of profits, and give advice on how you can

train yourself to think smart and trade smart. One observation I have made in my

financial markets experience is that traders both big and small often employ too

much risk. Another, more so nowadays, is that they trade too frequently. It is

also well documented that the majority of traders are quick to take profits and

slow to cut losses. By committing to a disciplined strategy and sticking to it, you

will find that in most cases, trading performance will improve. Understanding

the risks and dangers of trading is fundamental to staying in the game. You can

beef up your tactics by learning from the Currency Kings.

The last point I wish to make is that if you are serious about trading, it is

possible to win. As with most things, if you wish to do it well, it requires

preparation, time, effort, and dedication. It also requires continuous focus, guts,

tenacity, and coolness under pressure. Trading is not a walk in the park. It is the

business of making money, and that must be front and center in your mind. If

you are at all blasé in your approach, then you will lose.

If the performance metric of winners to losers is to improve, then it starts

with adopting a serious attitude. And that means doing the work. Discovering

your method of trading will then come naturally to you. By avoiding some of the

obstacles in your path you will improve your profitability. If along that path you

discover that you have a genuine competitive advantage, then you are well on

the way to winning. How much so depends on the competitive advantage and

the way to winning. How much so depends on the competitive advantage and

how scalable it is. But always be mindful about the risks you take. There are a

lot of very intelligent ex-traders who have been incapable of managing their

risks, and there have been a great many spectacular blowups.

The book Currency Kings, I hope, will act as a guide and an aide-mémoire to

your trading activities. If the book inspires people to trade with a plan and with

discipline, it will have achieved most of its goal; if it helps launch a new

Currency King, it will have succeeded beyond my expectations.

Table of Contents

Acknowledgments

Introduction

1 The Four Basic Trading Principles

2 George Soros: Global Macro King

3 John Henry: Technical Trading Genius

4 Urs Schwarzenbach: Writing FX Option Strangles

5 Online Currency Entrepreneurs: 

How the Early FX Market Makers Grew from Pioneers to Billionaires

6 Jim Simons: Quant King

7 Renat Fatkhullin: Social Trading and MT4

8 Caveat Emptor: Tricks and Traps to Avoid When Trading Online

9 Top Tips to Improve Performance

Notes

Index

Bookscreen

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regard to the subject matter covered. It is sold with the understanding that neither

the author nor the publisher is engaged in rendering legal, accounting, securities

trading, or other professional services. If legal advice or other expert assistance

is required, the services of a competent professional person should be sought.

—From a Declaration of Principles Jointly Adopted by a Committee of the

American Bar Association and a Committee of Publishers and Associations