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Jim Rogers: A Trading Success Story

March 15, 2015 by Kalen Smith 7 Comments

Eugene Fama and other renowned economists have long argued that neither individual nor professional traders can consistently beat the market. However, there are a few legendary traders that prove that beating the market is indeed possible. Many analysts might attribute their success to highly sophisticated trading strategies or divine intervention, but their method to their success is usually much more mundane.

We recently had the privilege of interviewing Jim Rogers, one of the most successful traders over the past century. Both amateur and seasoned traders can learn a lot from Rogers as they create their own trading strategies. Rogers states that traders can beat the market by specializing in trading securities in industries or asset classes where they are experts. If you aren’t familiar with Rogers, we have provided a brief background on him, so that you can better appreciate the feedback he offers.

Jim Rogers is a Trading Success Story

Rogers is widely regarded as one of the greatest traders of the 20th Century. He began his career on Wall Street shortly after graduating from Yale. However, Rogers quickly realized that working for an investment bank wasn’t the path to true financial freedom, so after three years of working at Arnhold and S. Bleichroder, he and Soros left to start the Quantum Fund.

In 1977, Rogers became a millionaire at the age of 35. Four years after making his first million, Institutional Trader magazine called Rogers “the world’s greatest money manager.”

Rogers success can largely attributed to his unique strategy of focusing on placing highly leveraged trades based around global macroeconomic events. While critics find some of his investing practices controversial, Rogers is also recognized as a trading success story.

Rogers’s Advice for Aspiring Traders

Rogers is unquestionably one of the greatest traders in the world. However, he consistently warns other traders not to follow his advice. He states that traders should find a system that works for themselves rather than following the same roadmap of any other traders, including him.

However, Rogers has provided some great lessons that every trader can benefit from. Here are some of his tips that both amateur and professional traders should follow.

Buy Low and Sell High

Even the most inexperienced traders understand that they should buy low and sell high. Unfortunately, cognitive dissonance typically prevents traders from following this seemingly basic and crucial principle.

One of the biggest reasons that traders fail to buy low and sell high is that they can’t gauge the direction of a stock or commodity price. Rogers said that traders need to identify extremely cheap assets and learn to tell when the prices are going to increase.

This is one of the reasons that he is currently avoiding U.S. stocks. Last month, he wrote on his blog that the U.S. stock market is higher than any year since 1929, which means that there are few opportunities for traders to make a return. In fact, he has predicted that a major stock crash will occur in the near future, which will force the Federal Reserve to inject money to stimulate it.

Rogers recognizes that undervalued markets offer many more opportunities. He is currently investing in the Japanese and Chinese stock markets, because they are currently 60% below their all-time highs.

Invest in What You Know

Whenever people ask Rogers’s for investing advice, he tells people to invest in what they know. Everybody has a wealth of knowledge about something, so they should buy in industries where they can understand trends better than the average trader.

“If you are keen on cars, read everything you can about the automobile industry,” Rogers says. “You will know when something is about to happen that constitutes a major, positive change.”

Here are a couple of ways that Rogers has put this idea into practice:

  • Rogers invests heavily in the energy sector. He has a professional background in the sector and founded The Rogers Global Resources Equity Index, so his expertise has enabled him to forecast trends in the industry before other traders, which allowed him to beat the market. This is consistent with his belief that people should invest in what they are experts in.
  • He invests a lot of money in Asian markets. Since Rogers lives in the Philippines and has visited Russia, his firsthand experience with these economies gives him a large advantage over other traders. He once made a fortune shorting the Russian ruble, but recently said that he is considering buying the currency, because he believes that President Putin is taking the country in the right direction. His unparalleled knowledge of Russia clearly gives him a different perception of the country’s economy than other traders.

Everyone is an expert at something, so Rogers argues that they should use their special knowledge and skills to gain an edge in the markets.

Understand How Markets Work

Rogers said that markets often behave irrationally longer than traders remain solvent. Traders must learn to discern real world market behavior from the trends they expect the market to follow. You may be able to successfully predict the direct of the market, but you will still lose money if you can’t ride the market out until it is time to close your positions.

Rogers learned this the hard way when he first began trading and tried short-selling six companies. Rogers accurately predicted that these companies would eventually go bankrupt, but they rose in value for several years before that. While his prediction was right, Rogers got wiped out when the value of these companies rose and his broker made a margin call.

In a discussion with Hard Asset Trader, Rogers said that he still feels he isn’t good at market timing. However, he has learned the importance of keeping maintaining enough capital to wait out the markets until it is time to close his positions.

The most important thing is to avoid being overleveraged. Rogers said that markets do stupid things, so you will need to have enough of a reserve to make sure that you can wait out those periods.

How do traders know if they are overleveraged? Traders themselves are their own best barometer of that. Rogers said that traders that spend the entire day following changes in the market instinctively know that their margin is too high. These traders are highly anxious, because a small shift in the wrong direction can wipe them out.

He started stating that traders were overleveraged several years before the financial collapse, but few traders heeded his warnings. Rogers actually began shorting U.S. equities and debt in 2006, because he recognized that the Federal Reserve policies had created a financial bubble that would burst within the next few years. He continues to urge other traders to avoid repeating these mistakes to avoid facing similar financial catastrophes.

Rogers states that traders need to thoroughly understand market behavior and the impact of Federal Reserve policies before playing in the markets.

Spend Less Time Investing

Paradoxically, Rogers claims that the best way to be a better trader is to typically spend less time investing. “”Most successful traders, in fact, do nothing most of the time,” he states.

The biggest mistake is that many traders become cocky after they make a lot of money. They may become overly convinced of their abilities, which can lead to them making some very poorly informed decisions.

Rogers feedback comes from personal experience. Around the time he started trading, he tripled his money in three months. He then got careless and was wiped out in two months after trying to short sell after a market rally.

Rogers told us that Hubris led to him making very bad decisions, so other traders shouldn’t do anything unless they are absolutely sure that they are making the right move.

Shun Diversification

Most stock brokers focus heavily on diversification. Major brokerage firms such as Fidelity and Vanguard focus on top-down hierarchal approaches to investing. However, Rogers argues that diversification is a bad practice for growth traders.

“If you want to make a lot of money, resist diversification. Brokers promote the motion that everybody should diversify. But that is mainly to protect themselves. The way to get rich is to find what is good, focus on it, and concentrate your resources there. But make very sure you are right,” he states.

Rogers attributes his track record to his ability to understand some markets and industries very well and focusing on them exclusively. He encourages other traders to follow similar practices.

Traders Should Find Any Strategy that Works

On the surface, most of the advice Rogers has shared may seem very simplistic. However, it is also worth its weight in gold for all traders.

The biggest takeaway from our interview with this legendary investing guru is that there isn’t a single path to success. He said that traders will need to follow the strategies that work best for them. For example, while Rogers doesn’t have any experience with algorithmic trading, he said that traders that have a knack for it should absolutely use it if it works for them. If they wish to become a trading success story themselves, they should be confident in their own strategy rather than listening to tips from their broker or other financial professionals.

Who is Jim Rogers?

Jim Rogers is a lifelong entrepreneur and trader. He founded his first business at the age of five selling peanuts. In 1973, he partnered with George Soros to found the Quantum Fund, which has become one of the most successful hedge funds in the world.

Rogers has justly earned a reputation as an investing genius. Between 1973 and 1983, the value of the Quantum Fund increased 4,200%, a return nearly 100 times larger than the S&P. The fund returned 3,500% by the time that he retired.

What is your favorite part of Jim Rogers’ story? Share your thoughts below

Filed Under: What's happening in the current markets? Tagged With: Jim Rogers, overleveraged

Is Your Account Overleveraged?

March 7, 2014 by Kalen Smith Leave a Comment

Did your broker ever tell you that you can leverage your trade? Here is a quick primer if you aren’t familiar with the term.

Leverage (also called buying on margin) means that you can borrow funds to place your trades. For example, let’s assume that you have $500 in your account. You could borrow $4,500 from your broker to place a $5,000 trade. This means that your account would be leveraged 10:1.

Leverage can be a great way to increase your return. In this case, you would magnify your return 10 times over. The downside with leverage is that it also magnifies your losses proportionally as well.

Dangers of Overleveraging

You shouldn’t be afraid to buy on the margin for fear of making some bad trades. You will inevitably make some wrong trades with or without being leveraged. The problem is that taking on too much leverage can completely wipe you out. Here are some things that you need to keep in mind.

Overleveraging your account is a disaster waiting to happen

You May Face Margin Calls

You need to put aside enough money in your account to cover any losses that you incur. The money that you set aside to cover losses is known as the usable margin. Your broker will allow you to keep a trade open until the loss is equal to your usable balance margin.

This is a complex topic, so let me illustrate with an example. You opened an account with $1,000. You decide that you want to buy 10 mini lots (10,000 units) of the EUR/USD. You decide to use $500 to place a $100,000 trade by leveraging your account 200:1. This leaves you with a usable margin of $500.

Every pip is worth about $10, which means that even small fluctuations can have a substantial impact on your account. You will get a margin call as soon as it falls 50 pips below the purchase price. You would either need to increase the size of your usable margin or close the trade.

Why Margin Calls are a Concern?

As I stated earlier, your losses are significantly higher when your account is leveraged. Rather than losing $50, you will lose $1,000 if your account is leveraged 200:1. This can obviously cost you a lot of money if you made a bad trade.

However, being overleveraged can also cost you if you made the right trade. You may have accurately predicted that the currency would increase by 100 pips in the next 48 hours. However, the forex market is often very volatile. The price may drop by 50 pips before rebounding to the strike price. You would face a margin call and close your trade at a $500 loss before you got to realize your profit.

Placing a trade at a 200:1 margin would have been the wrong decision in this case. What would have happened if you leveraged your account 50:1 instead? Each pip would only be worth about $2.50. You would still have $375 in your usable margin if the price dropped by 50 pips, which means that you wouldn’t receive a margin call from your broker. By the time the price rebounds to 100 pips above the purchase price, you would have earned a profit of $250.

Your leverage ratio would have made the difference between a $250 profit and a $500 loss. It is important to keep that in mind when making a trade.

How Much Leverage Should You Use?

Everybody forex trader makes mistakes. You will become better at investing over time. However, you need to make sure that you don’t lose your shirt before you have a chance to learn the lessons. If you are a beginning forex investor, then you will probably want to use a much more conservative leverage ratio. Some investors recommend using a ratio of 3:1 or having no leverage at all.

Even seasoned traders need to be careful when making trades. Many aggressive traders use leverage ratios under 10:1. More cautious investors may use a leverage ratio of 3:1 or less.

Choosing a leverage ratio is a blend of art and science. Here are some things that you will want to keep in mind:

  • The market volatility. Prices can fluctuate much more significantly at some times than others. The average daily movement for the EUR/USD was 185 pips in 2008, compared to 110 pips in 2013. You can face a margin call much more quickly in a volatile market, so a lower leverage ratio would be smarter.
  • Correlation between currency pairs. Prices can vary considerably between different currency pairs. Average movement between the EUR/USD last year was 110 pips, while the GBP/JPY was 189. You would probably want to use a lower leverage ratio if you were trading the second pair.
  • Duration of your strategy. You will need to consider how long it will take to execute your trade. You may plan to keep your trade open for three days. It may be a good idea to set your usable margin so that you could incur an “average” loss for at least two of those days. If the average pip movement for your currency pair in the current market seems to 150 pips then you may want to make sure that your usable margin can cover a 300 pip drop. You may want to be even more conservative if the market is starting to become even more volatile.

Shaun also prepared a great video showing how the risk of any given trade affects a trader’s chances of blowing up.

There are a lot of factors to keep in mind when you are setting a forex margin. You will need to keep these in mind and decide how much risk you can take. Successful forex traders often leverage their investments, but they know how to do so wisely.

Filed Under: How does the forex market work?, Stop losing money Tagged With: correlation, forex, leverage, margin, volatility

Using Excel to Receive Real Time Forex Data from Yahoo! Finance

March 4, 2014 by Kalen Smith 9 Comments

“Procrastination has been called a thief,–the thief of time. I wish it were no worse than a thief. It is a murderer.”

Every Forex trader should live by this quote from William Nevins. Your opportunities deteriorate with every second that you delay making a decision. Traders that have access to real-time data have a huge advantage over the rest of the market.

There are some premium tools on the market, but you don’t need to invest in them. You can export real time data from Yahoo! Finance for free. I found a great VBA script that can do this for any currency pairs that you are trying to track.

Using Yahoo! Finance to Get Real-Time Forex Data

Many Forex traders use Yahoo! Finance to monitor currency prices. Unfortunately, the site isn’t perfect. The biggest limitation of Yahoo Finance! is that prices aren’t listed in real time, but Joshua Radcliffe has created a VBA script that gets around that. Here are some steps to use it to get real-time prices on currency pairs.

  • Open up Microsoft Excel
  • Click on the Macros tab and select the View Macros option
  • Create a name for your Macro in the box
  • Click Create
  • Add the code listed at the bottom of this section into the code editor
  • Change the values in currency 1 and currency 2 to the currency pairs that you would like to monitor. For example, you could set currency1 = “EUR” and currency2 = “USD” if you want to see the price between the dollar the euro. You can also keep the code as is and reference the values for the currencies in the cells shown in the code. However, my solution is easier if you are following a specific currency pair.
  • Click View Macros again to select the Run option
  • The real-time data will be shown in cell C9

This script will give you all the real-time data that you need including the market price, the ask price, the bid price, the 1-year target estimate and the beta-coefficient. You can run the program as many times as you would like.

Forexmacroresults

Here is the code that you will need to add:

Sub Macro1()

‘

‘ Macro1 Macro

‘ Provided by Joshua Radcliffe

‘ www.JoshuaRadcliffe.com

 

Dim currency1 As String

Dim currency2 As String

 

currency1 = Cells(4, 3).Value

currency2 = Cells(5, 3).Value

 

Range(“B9:C12”).Select

Selection.ClearContents

 

With ActiveSheet.QueryTables.Add(Connection:= _

“URL;http://finance.yahoo.com/q?s=” & currency1 & currency2 & “=X”, Destination:=Range(“$B$9”))

.Name = “q?s=” & currency1 & currency2 & “=X_1”

.FieldNames = True

.RowNumbers = False

.FillAdjacentFormulas = False

.PreserveFormatting = True

.RefreshOnFileOpen = False

.BackgroundQuery = True

.RefreshStyle = xlInsertDeleteCells

.SavePassword = False

.SaveData = True

.AdjustColumnWidth = True

.RefreshPeriod = 0

.WebSelectionType = xlSpecifiedTables

.WebFormatting = xlWebFormattingNone

.WebTables = “””table1″””

.WebPreFormattedTextToColumns = True

.WebConsecutiveDelimitersAsOne = True

.WebSingleBlockTextImport = False

.WebDisableDateRecognition = False

.WebDisableRedirections = False

.Refresh BackgroundQuery:=False

End With

 

End Sub

I have tested Radcliffe’s code for the CHF/JPY currency pair. The prices are slightly different than those listed on Yahoo! Finance. This shows that Daniel’s script works as claimed.

Applications of this Data

There are a couple of reasons that this data can be useful. First of all, you can use this script to get real time pricing data on your currency pairs. This gives you a significant advantage over traders that are relying on Yahoo! Finance’s charts, because they have a 15-minute lag before prices are updated.

You can also record prices throughout the day and use a variety of Excel tools to observe pricing trends. Run the macro and record the price data in a different cell each time. You can select all of the prices and use them to create a two-dimensional line graph in Excel. If you haven’t used Excel before, simply follow these steps:

  • Select the prices in the cell (they should all be organized in a column)
  • Click on the Insert tab
  • Click on 2D line to create a graph with the data that you selected
  • You can copy and paste the various charts that you create into a separate document where you can see them later

You can also run a regression analysis. You will need to go to the Excel options tab and click Analysis Tool Pack. You will then need to select Tools and then click Add –Ins. After you have followed these steps, you can click Regression Analysis from the Data Analysis tab.

You may want to monitor pricing trends near popular trading hours. I would recommend monitoring pricing trends between 8 GMT (3 AM EST) and 9 GMT (4 AM EST), because that is one of the most popular trading times. It will take some discipline to wake up that time every day if you are living in the East Coast on the United States, but every bit of knowledge is worth the sacrifice. You can gather approximately 20 data points during that timeframe to draw a trend line. This will give you a better understanding of the trading behavior of the rest of the community.

If you want to get particularly detailed then you can create separate line graphs for different days of the week. You may need a couple months to collect this data, but it will give you a significant advantage over other traders.

Are There Other Options to Get Real Time Data?

There are other tools available to get real-time price data on currency pairs. However, there are a couple of reasons that I would recommend this VBA program instead.

First of all, you don’t have to pay to use this script. This is a great advantage for beginning Forex traders that don’t want to invest a lot of money.

The script also makes it much easier to observe trends. Most other tools that offer real-time Forex data are streaming tools. They may help you make decisions based on the current trading price, but it can be difficult to copy the data and use it to create line charts.

Overall, I would recommend this script over any of the other real-time Forex tools on the market.

Filed Under: How does the forex market work? Tagged With: currency, excel, macro, Yahoo Finance

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