A Personal Story: Life’s Lessons and Forex

Learning to trade forex is something I believe many people can do if they are willing to do a bit of homework and keep their minds open to new ideas. As is often said “a little bit of learning can go a long way” so if you’re willing to do that little bit you can take that knowledge and turn it into real profits.

Let me tell you a personal story that while not connected directly to trading is something you can use.

When I was in my teens and early 20’s my goal in life was to be a rock musician. I had taken piano and guitar lessons as a kid, but ultimately decided to concentrate on the bass being that I always was a great admirer of Paul McCartney and the Beatles.

I can remember spending many happy hours learning the bass parts of Beatles songs as well as the songs of many other groups. After a while, I was able to graduate to more complex music from bands like Cream and The Who whose bass players (Jack Bruce and John Entwistle) were considered to be some of the top technicians.

I also very much liked the music of a band called Yes and especially their bass player, Chris Squire. If you’ve ever listened to their records you’ll notice that Squire’s bass had a very unique sound (I’m not talking about the style of his playing but rather the actual sound of the instrument). Listen closely to the bass in their song “Roundabout” and you’ll hear what I mean.

Squire played the Rickenbacher bass (McCartney used one at times also although he was much more famous for using the Hofner violin-style “Beatle” bass). I already had a Hofner bass and because I admired Squire and his sound so much, I got a Rickenbacher (a “Rick”) as well.

Unfortunately, after plugging the new Rick into my amplifier, I came to the sad realization that it was not producing the sound that Chris Squire could get. No matter how I adjusted the controls on the Rick, or on the amplifier, I could not get my Rickenbacher bass to sound like I heard on Squire’s did on the Yes records.

I grew up in NYC and on west 48th street is a row of musical instrument stores. Musicians from all over the world would go to Manny’s Music on west 48th street for their instruments. Manny’s had pictures on their wall of every famous musician who had ever been in the store, including all my bass heroes. I bought my Rick from Manny’s as well.

So, I went back to Manny’s and started asking the sales guys (who were all musicians themselves) how Squire got his sound. The problem was that no one knew how it was done. Everyone was in the same boat; all the bass players wanted to get the sound but none of them could.

To make a long story short, one day several weeks later I picked up a British music newspaper called Melody Maker. In it was a small ad for “RotoSound” bass strings and at the bottom of the ad was a picture of Chris Squire along with the quotation “RotoSounds are just great!”

Man, was I excited. Perhaps the key to getting the Squire sound was using the Rotosound strings. I went right back to Manny’s and asked for set of Rotosounds. Problem was that Manny’s didn’t have them and had never even heard of them. They were however willing to order some.

When Manny’s finally got the strings, I couldn’t wait to get them home. As soon as I got the first one on my bass, before I even plugged the bass in, I heard the sound I was looking for. Finally, I could get the Chris Squire sound!

So, what are the trading lessons here?

First, learning to do anything is a process of trial and error over a certain amount of time. No big revelation there. The problem with forex is that real learning is going to involve losing some money, because you can’t learn to trade without taking a certain amount of losses. Losing money can be stressful for most people, so the key here is to be able to deal with the stress.

In order to do that, let’s put things in a different perspective. For example, let’s say you’re going to college to learn accounting. It’s going to cost you money to go to college and it’s going to take a while before you graduate and make a profit from your investment. But while you’re in school, do you worry about the money you’ve lost paying tuition? Probably not. So, treat your forex losses the same way; they’re an investment in the learning process and once you start looking at things that way, it will be much easier to deal with the inevitable losses.

Second, you should find joy in the process of learning. During the whole time I was practicing music and doing things like finding the answer to the Chris Squire sound, I never once thought about the money I might possibly make. In all honesty, I don’t think that if I would have earned millions playing music that I ever would have been happier than the day I first got those Rotosounds on my bass. The real joy is in the doing.

If the money is your first consideration, it’s going to be too painful when you take a loss. That’s going to make the trading process even more difficult and get in the way of your learning. Your real goal here should be to learn. Let the money be secondary and it will come as a natural result of your efforts to be knowledgeable about your craft. So, let’s gain a bit of knowledge.

Market Correlations

Market correlations are pretty straightforward once you realize something: Forex does not exist in a vacuum. The fact is that currencies, equities (stocks), futures (including currency, stock index and commodity contracts), options, commodities and Treasuries are tied together in a vast trading continuum based having one thing in common-they’re bought with dollars and therefore they all (excluding Treasuries which for all intents and purposes are the same thing as dollars except that they pay interest) trade against the dollar.

This is very valuable information to know as a currency trader because if we have the pulse of market sentiment, we know which way the dollar is going to move. The dollar will gain as the other asset classes depreciate and it will fall as they increase in value.

And Now For Something You Should Find Really Interesting

Our erstwhile chairman of the Federal Reserve has been working overtime during the past 2 years to depreciate the dollar, an effort which has been partially successful at times but failed utterly after the collapse of Lehman Bros last September.

Once this systemic investment bank failed in a disorderly way, investors rushed out of the riskier asset classes (stocks and commodities) and into the safe ones (the dollar and Treasuries). This naturally caused the dollar to appreciate. As a currency trader, you could have made a huge score selling the euro, pound and A$ against the USD if you had recognized that the market was going to panic ex post Lehman.

The market was still feeling the reverberations of this on March 6 of this year when a new low was made on the S&P 500 despite Mr. Bernanke’s trillions of dollars in liquidity programs (his “credit easing” policy) and 0.00% to 0.25% interest rates. He then did quite a remarkable thing; he went on nation television and announced that the Federal Reserve was “electronically” printing dollars.

Simply put, printing dollars (electronically or otherwise) means the Fed is actively trying to depreciate them. The reason he did this was to create some level of inflation in order to counter the far more serious effects of deflation.

Once market participants became convinced the Fed was actually attempting to depreciate the dollar (create inflation) they moved out of the two asset classes guaranteed to lose value in an inflationary environment-the dollar and Treasuries-and into the asset classes which appreciate when inflation is either a possibility or actually happening-stocks and commodities.

In other words, Mr. Bernanke created a stock and commodity rally by his efforts to convince the market he was actively trying to depreciate the dollar. And as a currency trader, you could have made a huge score buying the euro, pound and A$ against the USD if you had recognized that the market was going to buy the riskier asset classes (stocks and commodities) ex post his admission on national television.

More To Come

Over the next few weeks and months I plan to write a lot more along these lines and we’ll use what’s happening during this historic time to find opportunites to profit by trading forex. So, I hope you’ll join me as we continue down the path of this journey to learn.