In this short tome I will sometimes refer to attaining a granular understanding of something. This is the process I like to call “becoming relevant” whereby you program yourself to respond instantly with confidence to a situation you find yourself in.
If you are tired of not knowing the answer to something or being unsure and looking stupid when your answer is only partially correct or even completely wrong, then the easiest way to cure this is to learn.
One of the traders I used to work for espoused making myself relevant to me one day at the pub and it stuck. Despite the fact he was a highly intelligent and accomplished trader who could analyse markets, central bank rhetoric and data sets in an instant, he was also completely clueless about much of the workings in operations and execution, where I was working.
When I was promoted to the middle office this is where I became relevant to him and the team, with things such as margining in futures. Even FX translation was a struggle for some of these guys, which is odd, but when you make money in Yen at 3am, and you are domiciled in AUD, the precise AUD equivalent of P&L from that specific trade can sometimes elude you.
That’s where I came in, and part of my job was best execution in the market to convert that residual P&L (JPY before or after the fix?) at the opportune moment and let them know the price.
It’s also when they are trading treasuries, reminding them that options are priced in 64th’s and not 32nd’s was another one.
Or reminding them of a tick value in a future, like the SPI, or bills, or Crude over Brent, or what was the face value of currency futures again, Matt?
Knowing that stuff off the top of your head in a trading room where rapid fire questions are being trained on you like a US war machine on the Taliban in Afghanistan comes in pretty handy.
I believe this is at the heart of trading in many ways, especially macro and technical. Once you begin to focus on a particular market, let’s say US rates, then you deep dive into all the information you can on that topic.
Why is this important, apart from the obvious relevance to the trade? An example in each category:
– A central banker makes a statement and slightly changes rhetoric.
In this case, if you have been reading and following the language from the central bank, and that speaker (dove or hawk?), a small shift in position can be the first indication of a broader move in the opposite direction.
– A chart pattern emerges that you have been following for some time.
Again, you’ve been pouring over chart formations in various asset classes looking to pounce on a signal and once this information hits the market all the stars begin to align. You can then position for entry points quickly knowing exactly where they should be because you’re so immersed in this position it is second nature.
Essentially, when you are watching this happen live you can react. You can open a trade. Or if you already have one on, if the position is a new one that you’ve had on for only a few days which is small and you’ve been building into it, you can cut or reduce to a more manageable size before looking for an exit point or readjusting stops etc. In larger, more portfolio style positions that are longer term, you can quickly hedge or add some protection to a position to save some money, before going into one of those big boring meetings with the whole team to discuss fully unwinding a position that you all know should be done, and you are just wasting valuable time.
“The secret to being successful from a trading perspective is to have an indefatigable and an undying and unquenchable thirst for information and knowledge.”
Paul Tudor Jones. Hedge Fund Manager. Trader. Philanthropist.