At the End of 2024...

The Federal Reserve has really dropped the ball 

The only thing that I’m going to talk about from a strictly market perspective in this newsletter is the Federal Reserve. I cannot tell you how bad they have completely fucked things up. The Federal Reserve has cut 100 basis points in the last several months, but the 10-year yield in the United States has gone up 10 basis points! This means that the bond markets are explaining to the Federal Reserve that inflation is still an issue, but the Federal Reserve is choosing to ignore it. 

The Federal Reserve has a long and storied history of missing trends. Quite frankly, I’m old enough to remember about a year ago when they said that “inflation is transitory.” We have since learned differently. I’m also old enough to remember when Ben Bernanke, former Chairman of the Federal Reserve, stated unequivocally that “there is no issue in the housing market.” This was a couple of months before the Great Financial Crisis. In other words, these people are losers. 

This is going to be the story of 2025. The bond market is going to drive the direction of risk appetite and what the next move is. I truly believe that the US dollar could destroy just about everything in the world over the next several months. It won’t happen all in one shot, but when you continue to see higher interest rates in America than pre-much everywhere else that trades in any volume with the Americans, it means that the US dollar remains strong. 

I recently put out a video for my signals group about the importance of the US dollar. Quite frankly, if you get the US dollar correct, you get the Forex markets correct. We currently have $330 trillion, as of 6 months ago, of global debt. About 98% of that is in US dollars. The demand for US dollars will be going nowhere anytime soon. Every day, I see comments about how the world is running away from the US dollar, but it might be worth knowing that central banks hold more US dollars in reserve than they have since 2008. At this point, the United States dollar is still 58% of foreign exchange reserves. The closest currency to that is the euro, which is somewhere in the neighborhood of around 17%.

 I believe that the most important thing to pay attention to in the year 2025 is going to be what happens in the US bond markets. If rates don’t turn around quickly, we could see quite a bit of damage done. As I write this article, the US 10-year bond is yielding 4.579%. If we were to break above the 4.75% area, things could get ugly rather rapidly. If you wanted to know why gold is somewhat sluggish after ripping the way it had earlier in the year, this chart is a good place to start.

 Reflections at the end of the year

Anytime I get to the end of the trading year, start to think about all of the things I could do to perhaps improve my craft. While sorting out all of the things that could make me a better trader personally would be an entire novel in and of itself, there are some basic things that I can honestly say I need to work on. The point of this newsletter is not so much about the next trade but more or less about the reality of trading itself.

We must be more honest with ourselves.

One of the biggest mistakes that I see traders make, and this includes myself, is that sometimes we just aren’t honest with ourselves. Trading is a game that destroys the ego, and different people deal with it quite differently. Some people eventually sort things out and turn to statistics and become true believers in that skill set. For example, some people are perfectly fine winning 54% of their trades because they know they will make money in the end. What I believe makes these people successful isn’t the statistical edge; it’s the ability to believe in it. I have seen countless traders with a theoretically profitable trading system make a few emotional mistakes and wipe out any advantage they had. Unfortunately, this is a very common theme for retail traders.

It is sometimes hard to let go.

The reality is that we do not have managers standing behind us like professional traders do. There is nobody telling you to cut the position whether you want to or not, and for your own good. It’s very easy to sit here uncomfortably watching a position that you will “think” could go higher, but it doesn’t want to. Sooner or later, you have to let things go and exit the position. This is one of the hardest parts of retail trading. Sure, any idiot can look at a chart and say, “If this asset drops below this price, I need to be out of the position,” but to actually do it isn’t always the easiest thing for us.

You are the only one to compare yourself to.

Unfortunately, we live in a world of social media. It is a bit of a mixed bag, because I have met many of you through it, and it has helped create a career for me on various websites. However, it also leads to comparing yourself to other traders, most of whom are lying to you to begin with. I can’t tell you how many 21-year-olds I’ve seen with rented Lamborghini videos suggesting that they made all of that money trading (insert latest financial scheme here) over the last several months and suggesting that they can do it forever. Take Bitcoin, for example. Any idiot could have made money holding onto Bitcoin over the last couple of years. However, very few people were comfortable losing 80% a couple of times along the way. I have no issue admitting that I am one of them. However, to suggest that somebody bought Bitcoin 10 years ago and has simply held onto it is some type of financial genius is laughable at best. You just wouldn’t take your loss, and the market has bailed you out multiple times. (This is not an indictment on Bitcoin; it’s just the first example I can think of.) 

Almost all issues for traders begin with position sizing. 

I have found over the years that 99.9% of the time that I am very upset about a trade can be traced down to one thing: position sizing. Think of it this way: if you are trading 0.01 lots of GBP/USD, you are trading for one penny per pip. Nobody is getting upset about being down 40 pips at that point. However, far too many of you have a $1000 account and are trading 0.5 lots. Instead of being down $0.40, you are down $200, meaning you are down 20%. It all comes down to perspective. 

A simple exercise in thought here: If you start with $10,000 in your trading account, compounding it 15% per year for the next 10 years would mean that you would have $40,455.58 in your trading account. While I understand that doesn’t seem like a huge gain, the reality is that it ends up being a 304.56% gain in a decade. Furthermore, this assumes that you did not put any more money into your account, which, if you were steadily profitable, it would be foolish not to. In fact, if you add just $1000 at the end of every year, you end up with something along the lines of $64,760.62. I could go on, but if you add more frequently, perhaps something like $200 each month, the numbers start to explode much higher. 

The biggest issue, of course, is that we are attracted to trading with the hope of quick gains. This is the killer, and this is exactly why prop firms are set up the way they are in order to get you to “gamify” the entire process. I know it’s seemingly unimpressive, but if you can consistently make more than 20% a year, you can get a job as a professional. The main difference, of course, is that they are trading larger accounts while you are not. It doesn’t “feel” rewarding to be up 19% in an account that started out with $1000. However, it’s a pretty fucking impressive feat, assuming that you did it steadily and in a professional manner. Give yourself some credit. You deserve it.

Worst time of year

This is by far the worst time of year to be trading, and therefore I think most of you would be better off staying away from the markets. Unfortunately, my day job means that I will be watching the markets, and in this environment, there isn’t much to watch other than markets go sideways. I get emails all the time from people looking to find the next hot trend, but the reality is that with some of the people I work with in private, most of the thought process goes into the behavior of the trader themselves. Any idiot can read a chart, I know this because it’s what I do every day. However, it takes a lot more effort and work than simply looking for a shooting star to start shorting a market. And this is where retail traders struggle, because they don’t understand who’s involved in the market this time of year. The answer is to simply put by the phrase “nobody important.”

 Trade well,

Chris