A painful baptism
Being an FX trader in a bank is a unique experience that cannot be fully understood by market users who have the luxury of a constant stream of prices and a comfort of only trading when the conditions are right.
Imagine being forced to make a price to a bank that you know is going to try to force you into a position you do not wish to take. Fortunately, interbank trading is not a binary market, so it is not the case that I must lose for my competitor to gain.
My first few days/weeks as an interbank trader were a painful introduction, but I was shown support from my boss which encouraged me to continue. I was, however, losing money most days as no matter what I tried to do, I never seemed to be able to out think, or more likely, outguess, my competitors. I was often hit on my bid or taken on my offer to never see the price again or get the opportunity to cover my position even without a profit.
The desk I worked on traded all the European currencies. Since this was before the advent of the common currency, we traded Spanish Pesetas, French and Belgian Francs, Dutch Guilders and Italian Lira amongst others.
Each of my colleagues seemed to be able to read their markets far more readily than I was and I remains the only money losing “ugly duckling” throughout my first month. The pressure was beginning to build as I was painfully aware of the “three-month probation” that we were all facing, and I was starting to drown.
One evening the traders were all out in a local bar celebrating one of our colleagues’ birthday when I was given the piece to the trading jigsaw that saved not only my job but probably my career.
I was chatting with the Italian Lira dealer, the undoubted star of the team, who constantly made profits well in excess of his budget. He was very outspoken and told me that I was “setting myself up to fail”. He asked me what went through my mind as I was making prices to banks who were clearly going to move the market. Following my blank stare, which he subsequently told me reminded him of a “rabbit caught in a cars headlights”, He told me where I was going wrong.
Be the Market!
“If a bank calls you for a price, in that moment you are the market. Listen to the squawk boxes, of course, but make your mind up based on three things; what is he going to do, what do you want him to do and what is your position”
That one statement was the catalyst for a career which may not have always been successful has at least had longevity!
“Be the market and use your price to gauge what he wants to do. If he passes a low bid or high offer, you know what he is going to do. That piece of information allows you to formulate your strategy. If you are square and he passes a low bid you have an opportunity to sell, via a broker, knowing that he is going to sell a large amount somewhere as he probably has an order from a customer. If you are long you have an opportunity to exit your position unscathed. If you are already short add to your position”
That conversation allowed me to become the trader I hoped I could be and the following day a fresher more aggressive trader was born.
Tomorrow I will tell you about the Russian Coup of 1991 and how I nearly burned to death as a result.