The difficult environment for currency traders in 2006 makes the performance of KMJ Capital LLC, 28.80%, that much more impressive.
KMJ is a short-term fundamental discretionary currency trading advisor that also looks at technical inputs. Kenneth M. Jakubzak, principal of the Crystal Lake, IL, CTA, looks at numerous macroeconomic and technical factors and waits for them to align before entering a position. “I have to look at pricing for good entry levels and timing areas. That has to be positive along with my discretionary elements. If both of them are not positive I will not take the trade,” Jakubzak says. “I am looking at geopolitical situations and I am looking at the central bank policies and action along with FX sentiments and pertinent numbers that will move the market like ISM, non farm payrolls and the IFO in Germany.”
KMJ’s most profitable trades were in the British pound and the Euro in July and August. “All the fundamentals came together. I was looking at a weaker dollar, stronger euro and the Fed stopped raising rates. The Fed was a little bit dovish and the [European Central bank] became hawkish in their rhetoric and raised rates a couple of times. Along with weaker non farm payrolls, ISM started to come down and it all came together,” Jakubzak says.
He trades from a short term perspective because he says long-term traders give back too much profit. “My premise is that the currencies don’t have any long-term trends per se: that is, you will get 8 to 10 handles in a move and then they will retrace significantly — 50% to 75% — this is where the long-term trend followers who are systematic can get in but they don’t know how to get out. So consequently they are giving a lot of profits back where I don’t.”
Jakubzak’s strategy acts faster and attempts to catch both the move and the subsequent correction. “You will see elongated moves, but during that period you will see substantial corrections and this is where the profits are eaten up and where I react faster. If I see key turning points, if I see market momentum waning, depending on the position I will raise my trailing stop or get out,” Jakubzak says. “I am looking for a trade in certain areas and looking at time, price and volatility. And then match it up with the macroeconomics: Is this a good trade? Is it going to be supported by what is going on with CPI, PPI, non farm payrolls? Is the rhetoric from the central banks reinforcing it?”
When the fundamentals and technicals do not align, KMJ may get stopped out often or simply stand on the side. But tight stops allow KMJ to quickly find the next opportunity.
KMJ’s strategy produces many losing months, but tremendous risk adjusted returns. His worst monthly drawdown of the last five years is 5.12%. KMJ has had 19 down months in the last three years, but only four of those were down more than 1% and the program has never lost more than 2% in that period. His three-year compound annual return is 14.35%. Perhaps most impressive is that his upside/downside standard deviation is more than five to one.
