Born in 1956, Bill Lipschutz is a currency trader and the former Global Head of Foreign Exchange at Salomon Brothers (1981-1990). Today, Lipschutz is the Director of Portfolio Management at Hathersage Capital Management. He has been featured in two books (i) The New Market Wizards by Jack D. Schwager (1992), and (ii) The Mind of a Trader by Alpesh B. Patel (1997).

 

Bill Lipschutz Forex Trading Tips

■ Being a Fundamental Trader

I don’t trade on dreams or rumors. I'm a fundamental trader. I try to assemble facts and decide what kind of scenario I think will unfold. You can even argue further that playing out scenarios is something that I do all the time. That is a process a fundamental trader goes through constantly. What if this happens? What if this doesn't happen? How will the market respond? What levels will the market move to?

 

■ The Currency Market is all about relationships and entering the interbank circle

Foreign exchange is all about relationships. Your ability to find good liquidity, your ability to be plugged into the information flow it all depends on relationships. Those of us who did well were generally the ones who were accepted by the interbank circle.

 

■ Stop-hunting by institutional players follows the direction of the greatest price vulnerability

Stops are picked off by institutional players when the liquidity is shrinking and follow the direction of the greatest price vulnerability (up or down).

 

 

■ The Foreign Exchange market constantly changes focus

One day the Foreign Exchange market may be focusing on interest rate differentials; the next day the market may be looking at the potential for capital appreciation, which is exactly the opposite. [A focus on interest rate differentials implies that investors will shift their money to the industrialized countries with the highest interest rate yields, whereas a focus on capital appreciation implies that investors will place their money in the countries with the strongest economic and political outlooks, which usually happen to be the countries with lower interest rates.]

 

■ The importance of following the trend and holding positive carry

It is well acknowledged that the most profitable market environment for FX trading is a trend – in particular a trend that unfolds over a medium-to-long-term time horizon. A key to profiting from a trend is the ability to stay in the trade and not be shaken out during periods of price consolidation or correction. Hold positive carry

 

■ Accepting only high probability trades

Don’t be in the market when there is no high probability trade. If most traders would learn how to sit on their hands 50% of the time, they would make a lot more money.

 

■ Fast-markets favor brokers

A fast market gives the floor brokers a special license to steal, above and beyond their normal license to steal.

 

Money Management Trading Tips

Bill Lipschutz believes that traders need to pay attention to the reward to risk ratio. For short-term trades, he looks for a 3 to 1 reward to risk ratio. 

 

■ Size is a huge advantage in foreign exchange. If a big buyer comes in and pushes the market 4 percent, that's an advantage. He still has to get out of that position. Unless he's right about the market, it doesn't seem like a large size would be an advantage. He doesn't have to get out of the position all at once. Foreign exchange is a very psychological market. You're assuming that the market is going to move back to equilibrium very quickly, more quickly than he can cover his position. That's not necessarily the case. If you move the market 4 percent, for example, you're probably going to change the market psychology for the next few days.

 

■ If you put in enough fail-safes, you don't make errors.

 

■ There are a lot of elements to risk control: Always know exactly where you stand. Don't concentrate too much of your money on one big trade or group of highly correlated trades. Always understand the risk/reward of the trade as it now stands, not as it existed when you put the position on.

 

■ When you're in a losing streak, your ability to properly assimilate and analyze information starts to become distorted because of the impairment of the confidence factor, which is a by-product of a losing streak. You have to work very hard to restore that confidence, and cutting back trading size helps achieve that goal.

 

■ You have to trade at a size such that if you're not exactly right in your timing, you won't be blown out of your position. My approach is to build to a larger size as the market is going my way. I don't put on a trade by saying, "My God, this is the level; the market is taking off right from here." I am definitely a scale-in type of trader. I do the same thing getting out of positions. I don't say, "Fine, I've made enough money. This is it. I'm out." Instead, I start to lighten up as I see the fundamentals or price action changing.

 

■ Making money by being wrong most of the time

I don’t think you can consistently be a winning trader if you’re banking on being right more than 50 percent of the time. You have to figure out how to make money being right only 20 to 30 percent of the time.

 

 

■ Bill Lipschutz Forex Trader

Forex-Investors.com (c)

Main source: New Market Wizards: Conversations with America’s Top Traders, by Jack D. Schwager, 1992