Bad Trading Discipline Pays Off (Sometimes)

In my previous post, Short Term Speculation on the Yen, I outlined the reasoning behind my short Yen, long Dollar trade. I described the reasoning from the dollar perspective, but I had not described the yen perspective, as I believe the story has been better describe by people like Kyle Bass much better than I can describe it. Here is his latest video on CNBC.

The Bank of Japan has moved as I had expected. They have released an unprecedented stimulus measure of essentially doubling the monetary base. Put another way, they will print out the same amount of currency that is already in circulation.

However, I was wrong in my reasoning from the dollar perspective. I did not realize that current fundamental relationship of the dollar to the stock market is a positive correlation – global players have shifted into the U.S. markets as China and Europe have performed poorly. If the U.S. stock market fails to perform at the same pace, these global players may move elsewhere.

Because the stock market performed poorly earlier in the week, the dollar moved lower versus the Yen. There was additional pressure from the other side, as people who had shorted the Yen previously were covering because they were unsure what the BOJ would announce. This resulted in the USDJPY exchange rate hitting my stop limit of 93.70, and plowing all the way down to a low of 92.33.

However, I committed the cardinal sin in trading. I moved my stop. I set my limit down to the 91 mark set in late February. (Moving the stop limit is dangerous, because it changes the risk/reward profile of the trade. By moving down the stop, I was risking more, to gain the same potential profit).

Why? I was convinced the BOJ had been backed into a corner. There is no way out of Japan’s mess but printing money, and even this measure is not sure to work. Therefore I justified the move to myself. While it paid out in this case, it may not in the future, and moving the stop is, in general, not a good practice to adopt.

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