WE: Is it fair to characterize your approach as a shorter term breakout-type system?
MK: Yes. It involves a bit of breakout, a bit of Elliott Wave when it comes to counting oscillations, and support and resistance. The MACD (moving average convergence-divergence indicator) is involved as well, once again in counting oscillations. We’re not 100 percent governed by one thing.
WE: Support and resistance seem to play a pivotal role in your trading. How do you define these levels? Is it a discretionary process, or are you using some variation of standard channel breakouts, or something else?
MK: By looking at charts, really. It is more discretionary, because it tends to be the two of us looking at the chart and determining the levels. Daryl might say, “I think we need an order at 1.1980.” And I’ll say, “To me it looks like 1.1975.” And either I persuade him or he persuades me, or maybe we’ll split the difference. Let’s say we’re out of the market now (Oct. 4). Looking at the Euro/dollar, we’d probably have an order at 1.1880 on the downside and 1.1980 on the upside. We’re actually long the market at the moment at 1.1952, where the market is now.
WE: In terms of limiting your losses, how do you go about setting stop points?
MK: They’re based on support and resistance.
WE: So, relative to a support or resistance level you’re placing a stop?
MK: — between 30 and 60 points behind the market.
WE: What about taking profits?
MK: We’re fairly unique in that we try to run the position up until a set parameter.
WE: A profit target of some kind? approach? How long did it take you? Did you do any backtesting of any kind?
MK: I’m a great non-believer in back-testing, because it’s just very arbitrary. Initially, we traded our own personal account for about a year. That had big swings. We changed gears during that period playing about with leverage, and so on.
WE: So that was essentially an “incubation” phase — real-time trading instead of testing?
MK: Yes. We would alter trade size, leverage, and stop parameters. But from day one of the incubator phase, the idea of trailing orders behind a position was always one of the main cornerstones of the system, as was monitoring the market 24 hours a day.
WE: Your annual returns show that 2003 was the bad year. What went wrong that year and what did you learn from it?
MK: We were continuously involved in the market, and it just kept catching us, really.
WE: Do you mean you were getting whipsawed?
MK: Yes, quite a lot. Many breakouts were false and we’d go back into the market and the same thing would occur again. It was in the latter part of that year — probably around October — that we decided to take the approach of not being involved in the market throughout. Also, we decided the distance at which we were trailing stops was too far. There were times we had very good unrealized profits, but then we’d give them back. It’s all very well having an unrealized profit of 90 points or so if you only end up booking a 5 or 10-point profit.
WE: To prevent this, do you tighten the trailing stop as time goes by and trail closer to price the longer the trade is open?
MK: Yes, we use a mathematical formula to tighten the stop loss at a certain point and time.
WE: On the flip side, it looks like 2005 has been a very good year so far.
MK: Yes, we’ve been very consistent, very steady. At the moment, we’re up 19 percent for the year.
WE: What do you think your edge is?
MK: I think we are quite dedicated to forex, and we do monitor it extensively. There’s very little time when we’re not monitoring the markets, even when we don’t have positions.
WE: What kind of weight do you put on fundamental considerations?
MK: We’re obviously very aware of fundamental news — economic reports and events such as Hurricane Katrina. We do pay attention to fundamental news, but that’s not the main driver in determining what position we have at any point in time. That’s determined by the way the train moves — the way the market swings.
WE: So there’s never a situation when a big event — a change of central bank policy, for example would make you override any systematic trading rules you had?
MK: If the market reacts to it, we would get positioned accordingly by our stop-in order. Look at the Bank of China. They announced recently they were expanding the yuan’s range. There were a lot of people who thought the dollar/ yen rate would never go above 112, and it’s up near 114.50. (It rallied to nearly 116 in the weeks after this interview.) I have a very cynical approach to the market, to be honest. Ten people could tell me, “You have to buy this, you have to buy this,” but I’ll just sit back and see what happens.
WE: Is there any discretion other than determining the support and resistance levels?
MK: No; that’s it. And with that, it’s something anyone who knows a certain amount of technical analysis could more or less gauge.
WE: So what are your plans for the business?
MK: To get bought by Citibank (he laughs).
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