Interview with Boris Schlossberg: “Risk control is EVERYTHING”

Today, we bring you an interview with Boris Schlossberg, director of currency research at GFT Forex, co-founder of BK Forex Advisors, and co-contributor to FX360. He is also a weekly contributor to CNBC’s Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted and appears in numerous newspapers worldwide. He is the author of Technical Analysis of the Currency Market (2006) and Millionaire Traders (2007). Below, Mr. Schlossberg shares his thoughts on risk management, leverage, currency wars, and other assorted topics.

Forex Blog: Can you briefly explain your approach to analyzing the forex markets. Do you prefer technical or fundamental analysis, or a combination of both?

I am primarily a fundamentally driven trader but I use price action to inform my trades as well, Specifically I focus on price action around the 00 levels to see if there is support/resistance there.

Forex Blog: How is your experiment to ignore real-time P&L going? Have you found that it has confirmed your belief in the Heisenberg principle and led to increased success in trading?

I have not had much of a chance to pursue that yet given the holidays, but I think just writing about the phenomena helped me to feel less pressured about the intra-day swing in my P&L.

Forex Blog: I was intrigued by your assertion that over the long-term, the tortoise may beat the hare in forex trading. What are the practical implications of this notion? Do you think it supports using fundamental analysis and adopting a more long-term approach to trading?

No the key is that risk control is EVERYTHING. As long as you can contain your losses, if you hang around the market long enough you will be able to catch positive swings regardless of whether you trade fundamentally or technically.

Forex Blog: When the Euro rallied in the beginning of the summer, a number of forex commentators (myself included) declared a paradigm shift, whereby investors would stop worrying about risk and instead focus on the fundamentals. Ultimately, this shift never materialized, and the Euro appears to have resumed its decline. What is your assessment of the Euro’s recent performance, and what can we expect for the immediate future?

Everybody hates the euro and there are certainly many reasons to do so, but I think that China will no allow the EZ to fracture and if that’s the case then euro may have a chance to bounce in 2011. My favorite way to play that is long EURGBP.

Forex Blog: You blogged recently about an encounter with an aspiring forex trader, in which you advised him to “There is only one way [to succeed in forex trading]. You open an account and just trade.” That being said, are there any practical tips that you can offer to novice forex traders?

There is no substitute for experience. They say you need 10,000 hours of practice to master a skill and I think that’s a fair metric to use.

Forex Blog:  It has been said that the Fed is caught in a lose-lose situation, whereby its QE2 will fail and the US economy will drift back into recession or it will succeed in invigorating the economy and stoking inflation. Do you share this interpretation?

No. There is deflation in US – not inflation. The Fed is doing is the only thing it can and so far it appears to have helped the economy.

Forex Blog: I agree with your assessment that high levels of dangerous leverage (~50:1) are a recipe for disaster. Do you support the recent regulatory changes that effectively cap the maximum amount of leverage on forex trades? Is there a general level of leverage that you think is acceptable, or is it specific to each trade?

Yes I agree with regulation. I myself trade with 3:1 leverage and never exceed 10:1.

Forex Blog: As you pointed out, “The Psychology of Round Numbers” is a phenomenon that is observable on all aspects of life in which numbers are involved. As far as forex is concerned, have you observed that round numbers are almost always a source of either support or resistance? How can traders predict whether a currency pair will stop at a given (round number) level or surge through?

If we could predict that with certainty we would never have to work again . That having been said I watch those levels very carefully and I see them at play every single day both as magnets for stop runs and as targets for turn trades against the trend.

Forex Blog: A discussion of the major themes in forex markets wouldn’t be complete without mentioning the ongoing currency wars. First of all, do you think that the label “currency war” is fair? Do you think that most countries’ Central Banks will continue to intervene on behalf of their respective currencies, and do you think they will succeed in  preventing them from rising further?

I think intervention is much more ingrained in Asia where export driven economies depend on low exchange rates. In the long run its a horrible strategy because it will inevitably lead to anti-competitive behavior. (Look how well Germany, Switzerland and Netherlands perform despite high exchange rates).

Forex Blog: What is your advice for (forex) investors that want to beat the market during these uncertain times?

Focus on one strategy that you are comfortable with and refine it continuously.