Archive for January, 2010

How to trade: Why butterflies cause cascading margin calls

In the first blog on how to trade I have tried to explain why traders should not rush to open positions and that there was always another profitable trading opportunity in the waiting. The second blog is devoted to the phenomenon of the butterfly effect of cascading margin calls, which in my view is one of the most important forces driving market prices that few people talk about. Cascading margin calls come about because a butterfly; be it  a random news event or large market order, triggers a price spike, which leads to a margin call with one trader somewhere in the world who then has to liquidate a largish position enough to fuel a continuation of the price move triggering further margin calls. Cascading margin calls may last only for a few minutes or hours, but can also take days, weeks or even months. They can be so strong that they turn fundamentals upside down. To become a successful trader it is important to understand the phenomenon. (more…)

January 21st, 2010 | Market, News | | 12 Comments »

Why financial markets need a Richter scale

The international response to the Haiti earthquake was immediate and illustrates the benefits of the Richter scale. Thanks to the global seismic surveillance systems, geologists could accurately measure the strength of the earthquake: it was a major earth quake of strength 7.0, there was no need for second guessing. A major earthquake in a densely populated area causes huge personal suffering requiring international aid. Without waiting for more detailed analysis, international rescue operations went into action to mitigate hardship. (more…)

January 14th, 2010 | High frequency finance, News | | 8 Comments »

Why we need second by second interest rate payments

Financial markets still follow business conventions that were adopted at a time when transactions were executed manually. Hidden to the public are the details of processing of the trillions of USD transaction volumes traded on a daily basis in the world’s financial markets. Given the huge amounts of money involved, one would assume that the technology is state of the art but in actual fact this is not the case. The settlement of financial market transactions follows business conventions that were defined, when banking was done without the help of modern computers and processes were manual. This explains, why even today international payments take two business days, which is quite extraordinary in our age of instantaneous communication. This archaic payment system has a significant impact on financial market stability. (more…)

January 14th, 2010 | High frequency finance, News | | 4 Comments »

How to trade: slow food of trading

At Olsen, we have been researching financial markets for 25 years using tick-by-tick price data. We have developed a variety of information and risk management services and also have hands on experience from managing assets using quantitative models. Traders have repeatedly asked me, if I can give them recommendations on how to trade. In response to this, I will publish a number of blogs on the subject.

You have time

The most common mistake that a trader makes, is to rush into a position too quickly and to be too aggressive in his opening trade. There is no need to rush into a position and make a big trade, you have all the time in the world. Similar to the practice of serving slow food, I strongly recommend that you temper your natural impulse of trading at a high pace with large positions. (more…)

January 11th, 2010 | Investment, News | | 8 Comments »