Tea with Mike

This is the first article in the Interviews category and I hope you will enjoy it as much as I do. Both me and Mike will appreciate if you will provide your feedback after reading it.

I always liked tracking “exotic” pairs due to a strange feeling – like hearing a voice telling me “hey you! look here, carefully, there’s a great opportunity and nobody is watching… they are too busy scalping EUR/USD with 1-pip spread. Enjoy the next 500 pips move in this cross and be quiet. Shhht!”

One day, back in 2009, I stumbled across Mike’s Forex Blog and followed it ever since.
What really dragged my attention first was the tag line: “This blog goes where few traders dare – the exciting world of Forex outside the dollar!”

So I said to myself: “hmm! Another trader “quietly” following the same charts I look at, while everyone is partying elsewhere? …interesting”

Mike Kulej is a professional full-time trader and I admire his work. In fact, there are only a few trading blogs I follow, never missing an article no matter if I read it on my laptop, desktop, smart phone or Kindle – and Mike’s fxmadness.com is one of them.
Therefore, I believe that the following interview will be a great lesson that we can learn.

There are about 35 questions that I prepared for this interview but if you want to ask Mike anything, please use the comment form below the article and he will gladly answer your questions.

Hello Mike. What can you tell me about you – the person behind the website? How is a normal day in the life of Mike Kulej?

Hello. I am 43 years old, live in suburbs of Seattle, Washington, in the USA. My company, Spectrum Forex LLC, provides Forex related services, mainly hedging advisory to commercial hedgers. We do not manage money and I trade only own accounts. For the last couple of years I have been blogging, yes, about currencies, or rather about my adventures and misadventures while trading.
My average day is a little out of ordinary, due to my geographical location. The most active time for Forex trading happens during my night and early morning, after which I tend to do company business. All that keeps me busy but I like it.

Do you decouple from trading or you are always connected using mobile charting/trading? How do you like to spend your free time, recharging your batteries?

This may come as a surprise, but I do not stay connected all the time. In fact, I rarely even carry a cell phone. If I walk away from trading station, all open trades have stop loss and profit target attached to them. It does not bother me any more. Besides, since I am located on the West Coast of the USA, during my typical afternoon currencies are less active, so there rarely is a need to keep checking quotes. At any rate, it is good to clear the head of numbers, charts, probabilities and statistics. I do it by visiting bookstores, walks and eating out. Some physical exercise too, but I am not fanatical about it…

How did you get into trading and how did it affect your life in good or bad ways?

I do not have a financial background, but markets have been a subject of interest for a long time. I was a professional fisherman on boats in Alaska, Siberia and North Pacific, as far removed from the financial world as it gets. In the late 80’s and early 90’s there was very little generally available information on trading and most of it covered stocks. Vast majority of the books on the subject discussed fundamentals, which I found very vague.
One can say that they were suited for investors.

Then I stumbled on “How to make money in stocks” book by William O’Neil. This book fully described a specific strategy, demonstrating how stocks trades can be timed using charts. Immediately I was hooked on charts and started to read everything in sight. Most of the books on charting at the time were written by futures traders and were mostly available from specialized publishers. So I gravitated towards the futures markets.

Due to the nature of my work, I could only trade few months during the year. But while on boats I always had a pile on new titles and chart books from services popular then and the education continued. By late 90’s it was a laptop computer with whatever data was available. Old time futures traders, guys from the pits, often concentrated on markets like silver, T-bonds and Swiss Franc and those were the contracts typically featured in strategies. At the same time I worked for a company which employed a lot of foreigners.
We were getting paid off shore and the bank handling our money allowed for switching the currency in which the account was denominated. Obviously, we all tried to maximize our pay and I spent countless hours devising timing strategies for people in order to get as much as possible in their respective, domestic currencies. Thus my focused shifted almost exclusively to currencies.

In 1999 I opened first account with an online Forex broker, and the rest is, as they say, history. In 2001 I started to trade for a living, full time. But I must admit that my position was rather unusual. I did not have to quit my job, because of the prolonged time off I was enjoying during the year. That gave me enough time to prove to myself that I was able to actually produce income.

In case it didn’t work, I could always go back fishing, make some money and try again during next vacation. The changes were obvious, my lifestyle was turned upside down. The draw down was that trading is a rather lonely venture, which was strange for a while, so I participated in many FX forums and exchange boards early on. By now I grew accustomed to the solitude and actually prefer it that way. Makes for clearer decision making process.

The online forums and social sites, such as Facebook and Twitter, allow people sharing the same interest to communicate, talk, exchange opinions, become friends, argue etc. Did you make any trader friends online?

I have developed a number of worthwhile contacts through the social network. That said, I avoid undue posting and conversation and limit it to the time of the day when I do not trade actively. I value other peoples opinions about the markets, but when I make own trading decisions those outside inputs can be disruptive. For example, I go long NZD-JPY and at the same time somebody is trumpeting selling it. And let’s say, this person is correct. If this happens enough times, I might start questioning my own processes, doubts would be creeping up, indecision could set in. Not that I am always right, far from it, but it is easier for me trade my own ideas and make the necessary adjustments. That’s why my online social life and market discussions are confined to times when I am not “working”.

How much time have you spent learning and practicing until becoming confident in what you do?

In my case it was about 10 years, but it is misleading, because of my regular work at the time, as mentioned above. Also, my interests were shifting from stocks, to options, then to futures and finally to spot Forex. Plus, I never really forced the issue. If I was starting right now, with all the information available, the ease of access to markets and if I had a “normal” job while doing it, about 2 years would probably be enough.

What made you start your trading blog?

When blogs became popular, many of the social media websites, Myspace, Xanga and others, offered these applications as an add on to other features. I started one in order to keep my profiles there alive rather than for any other reason. Updates were sporadic, once a week, but I always managed to include something about trading. With time, I started to receive a lot of emails. Instead of answering them all, I tried to incorporate the answers into posts, which made them longer and longer. Eventually I decided to start a dedicated Forex trading blog and that is how FX Madness was born.

How does your blog help you and how does it help your readers?

It helps me in number of ways. I find it a good tool to practice discipline. Makes me feel somehow obligated to write a follow up to opinions expressed before (right or wrong). A matter of personal honesty and accountability for my trades. If it is in writing, I can’t easily brush mistakes aside (he,he), but rather learn from them. Also, it retains a good record of not only trades, but a line of thought  as well.
I can go back and review what happened in the past if a familiar situation emerges. As for the readers, hopefully they can use some of the techniques I am using, or better yet, get ideas of how to develop their own. More importantly, though, it should demonstrate that trading Forex is not all fun and games, but a lot dedicated effort and work.

What are your most important trading tools?

As my trading is right now, I would say that candlestick patterns are the single, most important tool. Of course, they do not exist in vacuum and must be combined with other principles. During recent months I have done a lot of research into Ichimoku charting and it is becoming increasingly important to me. It has not been discussed in the blog yet, but will be getting increasingly more coverage in the future.

On a scale of 1 to 10, how important are technical indicators/oscillators to you? On the same scale – rate price action, patterns, state of mind, economic events or fundamental analysis

In my early trading I relied heavily on technical indicators. At some point I developed a few. But as the time went on, their importance dropped. I still periodically take trades using strategies based on indicators. But overall, they are secondary, perhaps ranking at 4 on a 1 to 10 scale.

Price action and chart patterns take priority, combined with times of the day. They would have the highest ranking. I don’t trade economic events. That applies the most important ones, like interest rate changes, employment data, etc, but I often join in on trend (even if short-term), which was initiated by the announcement. So they would have ranking of, say 7.

Other fundamentals must be taken into consideration when developing longer-term views, but I don’t find them all that critical to a day to day trading. After all, I am not an institutional money manager, who not only has to develop long-term strategies for core holdings, but also hedge them in many instances.

Do you usually read other traders or analysts opinions? If yes – how do they influence your trading decisions?

Yes, I do. However, as mentioned before, I try my best not be influenced by opinions. But it is good to read others – somebody might have noticed something that I missed…

Do you exit positions manually when the market goes against you or you always wait for the stop loss to be hit? How do you determine when you are wrong in a trade?

A lot depends on the type of set up which was used for a trade. Most chart patterns provide more than one possible stop placement. Normally, I place a wide “hard” stop on the other side of the pattern, or range, that is a maximum I am willing to risk. At the same time I have a “soft”, mental stop level which watch. That one tends to be a half the distance to the main stop. After that it all depends on how the price moves. If the breakout, where my entry is, proves to fail immediately, most of the time the trade will be closed where my “soft” stop is. There is also an element of why the move against my position happened.

For example, if it is caused by a fundamental announcement, and it continues for at least an hour (for hourly charts) creating a strong candlestick pattern closing at or near the price extreme, that is a sign that the market sentiment is changing, and the trade should be closed. It is more an art than a science, except for the “hard” stop which is fixed.

What Risk/Reward ratio and leverage do you use?

Most of the trades have a risk/reward ratio of 1:1, at least initially. That way I tend to have more winners than losers, which is important for me psychologically. Some people employ very tight stops and have many more losing trades than positive ones, but the winners are big and offset the loses. Nothing wrong with this approach if one is a trend follower and has the patience to sit on the winning position long enough to cover the losing trades and make profit. The Turtle method comes to mind. This, of course, works only if the trends are strong and long, no matter what time frame one works on. On 5M chart 100 pips would be a very good size move, while on a daily chart this would have to be maybe 1000 or more pips.
There is also the time element here. This might be an important consideration if trades are left unattended.

In my discretionary trading I use very low leverage. For those rare trades using daily charts, it is normally 1 to 1 or leverage. That is per trade, which I could have a few of, still not using much margin. For the vast majority of trades that are featured in the blog, leverage is a very low 2:1. When trading very short-term price swings, I can go 4 to 1, maybe 5 to 1. In rare instances 10 to 1. Very, very low leverage by Forex standards.

In my personal opinion, anybody just starting to trade should trade without using any leverage until the trader can prove to him/herself that the account is actually growing. Once the profitability has been established, then the leverage can be raised to whatever the trader is comfortable with. It still should be done gradually.

What do you dislike about your own trading?

Not all trades are profitable! I hate that! But seriously, my trading is rather fragmented – many accounts, few different strategies. Part of me would like to pull all resources together, while the other one wants to be more cautious. I dislike this tag-o-war, but most likely will remain prudent.

What do you dislike about the Forex Industry?

False claims – period.
Unfortunately the industry, no, fringes of the industry, are riddled with lies and exaggerations. An unreal number of websites and promoters are marketing easy and fast money making systems. It is virtually impossible to assess these claims and many new traders simply fall victims to them.

What would make you visit a Trading Website on a regular basis?

Original writing, some different “angle” of seeing things. You do not find it on brokers’ or educational websites. Blogs are better candidates for finding something away from the norm.

What’s the best improvement in your trading in the last 3 years?

The biggest improvement is increased patience, no doubt. It gets easier to wait for the set up to form and not get into trades prematurely.

Did you ever quit trading or consider quitting? If yes, what was the reason and how did you overcome it?

Oh, yes. In my early trading severe losses, or long losing streaks were hard to overcome. How did I get over that? By taking time off. During the early years my job served this function – I was gone for a few months, had time to think things through, clear my head, do more research and try again. But I also think there was a big dose of stubbornness. Not so much in a sense of “getting even” or “taking a revenge” (that does not work!), but more like “ do not quit now, you are so close” approach. And continues education, which never stops. So much more to learn…

What are a few words every trader should live by?

You will not get mega rich in a day, but can go broke in one. Preserve your capital.

What do you think about automated trading?

Ah, the bone of contention in Forex circles over the past few years. Certainly institutions are using them, trying to eliminate the human element, mainly emotions. I am sure, however, that the question eludes to the explosion of the so called “robots”, which are sold left and right.

This may surprise some, but I do a lot of trading using automated strategies and API’s. All automated systems try to take advantage of some specific type of market condition, which happens with some frequency.
This could be anything, really, whatever catches the attention of the developer. The problem is that market conditions, no matter which aspect, change over time. They may very well return to previous behavior, but there are changes.
Pretty much the same way that the price moves from trending to trading (ranging) and back to trending again. Same is true for any one matrix used for given strategy.

Now, the robot is designed for only one condition. This may last for a while, but will eventually change, at which time the robot stops working. There is no way of knowing how long this losing period will last, unless one can see a data of past losing period, at which point one can get an idea, not certainty about what to expect. The kicker is, that those stretches can last for weeks or even months, before the strategy returns to profitability. What happens in case of promoters of the robots, is that they do not provide these records. One -two losing trades are nothing, one has to look for a more serious draw down.

Of course, that would not sell well, so some information is either omitted or somehow doctored. It is possible that some records are true, but this only means that the system has not been around long enough to face adverse conditions, which are sure to come. Also, when looking at past results one one has to honestly ask – do I really have the guts to go through the tough times.
A robot may show a losing period of 3 months, for example.

On paper it looks harmless, we can go through a stretch like that, no problem. But it is completely different when you go through it day after day and see no improvement. It is very difficult mentally. Yes, the robot can be tweaked, but if done time and again, it becomes completely different system and is an unknown property. All the past results might as well be thrown away.

Automated strategies are very popular with hedge funds and other professionals. Here is a look at how well these entities over past few decades. We can see that the results are not that impressive over time. How can some $40, $70 or $100 product do better, in the long run, than pros who have access to supercomputers and some of the smartest people around?

In short, there is nothing wrong with automated trading, but it has just as many pitfalls as discretionary form. It also demands a great dose of patience and discipline.

If you were a movie character, which one would it be?

Robert De Niro as Jack Walsh in “Midnight Run”. Conscience made him turn down certain riches (was dead broke) but in the end was unexpectedly rewarded.

Your best advice to aspiring traders in 5 words or less.

Do not over-leverage!

Are there things in trading that you consider myths?

There is a saying in Forex trading that “currencies will always return to today’s level”. Some people take to heart and remove stops, because the market will turn around soon and move in their direction. Perhaps, but it might take… years or decades. Those who shorted USD-JPY under 90.00 in 1995 had wait 15 years and there many more examples like that.

What makes you angry when trading?

Don’t know if “angry” is the best word. However, the most irritating to me is a situation when the markets are not moving at all. I find it much easier to adjust to a losing trade, than to a period of time when nothing is happening. A good example would be the current price behavior of the USD-JPY  - very small daily trading ranges, some strange spikes. Instead of fighting it, I do not trade this pair at all now, until there is a noticeable increase in activity. Thankfully, other currencies provide plenty of trading opportunities.

Tell me about your worst trade

Probably a trade in USD-CHF in 2002. It fell about 250 pips in a day, I had position in the red. Instead of closing it, I was sure that a bounce was due, so I added more to my losing position at ridiculous leverage. Much to my dismay the market dropped another 100 pips in 20 minutes. Margin call was issued for the account. To add an insult to the injury, 6 pips(!!!) below that the USD-CHF did find the bottom and bounced 250 pips in less than a day. Three months of profits down the drain in one day, plus original equity. Wiped out account. And at that time I was already trading for a living and should have known better. Thankfully, by then I had money spread out among few accounts – a hedge against unforeseen events and lapses of judgement (stupidity)…

And the best one

The best, or most satisfying series of great trades was during the sell off AUD, NZD and all JPY pairs in summer 2007. All of these trades made between 1000 and 1500 pips in a few weeks. The best part was that I was on vacation in Europe at the time and not even following markets. But these trades were small in size. Best single trade probably was the EUR-GBP short in early 2009. It netted 770 pips in a week. How often is it even possible to make that many pips in this pair in a single trade within a few days? Once, twice in a decade? It certainly stands out as a very, very good trade.

What’s your favorite joke? and your favorite song?

I have plenty of favorite songs. Among those that stand out are “Moonlight Shadow” by Mike Oldfield, “Wonderful life” by Tina Cousins. Favorite joke recently is to watch either Bernanke of Geithner on TV. Problem is – I don’t know whether to laugh or to cry…

Who would you take to dinner: Angelina Jolie or Catherine Zeta-Jones?

Catherine Zeta-Jones, of course. More class…

Do you feel more comfortable in a bull market or a bear market?

For a very long time my trading was dominated by long positions, thus a bull market was preferred. Now it makes no difference, but when I look at a chart I typically scan for buying opportunities first. Guess old habits die hard…

If you could turn back time, what would you change in your trading style and experience?

Looking back, in the early to mid 90’s I should have leased, or bought, a seat on the CME floor and tried trading in the futures pits. That would have been some experience. It does not mean that I would have been successful, ( I hope) but probably gotten the best education possible in trading.

How will be the Forex Market and trading in 10 years?

Some politicians are meddling in the markets, trying to impose fixed exchange rates. I do not think this will happen if they indeed want to have a free trade. The Tobin tax is another possible negative issue. Outside of that, the future of Forex looks bright. In case the Euro breaks apart (unlikely) there will be plenty of new-old currencies to trade.

One must also remember that currencies of the emerging economies like China, India, Brazil, Russia, Indonesia, South Korea and many others, are becoming more important every year. This means increased volume and liquidity. Within the next 10 years or so they can be as liquid Swedish Krona or the New Zealand Dollar are today, making them viable instruments for all types of traders. And the recent Euro problems cooled plans for more currency unions, so the pool of available pairs should not shrink any time soon.

How much time do you spend preparing (analyzing charts, reading news etc) for each trade? Is there a correlation between the amount of time spent preparing and a trade performance?

I spend a lot of time on going over charts and keeping up with the news, but do not find a correlation between that and any one SINGLE trade. I can be waiting for a trade for days, the price action unfolds as anticipated, but the trade still might turn negative, or non performing (break even) due to unexpected news. However, there is a strong connection to trading – one must commit the time needed for education and skill development. It is a must in order to become a profitable trader.

The worst trader you ever met

That is easy – myself when I first started!

And the best one. What was/is special about him?

A few years ago, during vacation in Belize I met a reclusive trader. No names, since he values his privacy and does not participate in any online forum or exchange. That could have changed by now, but I don’t know for sure. We got to talk and he revealed that he traded Forex for a living. I watched him take about 10 traders that day. Scalper, with extraordinary timing. What was most impressive, that he could just as easily trade pull backs as breakouts. Just candlesticks, no indicators and trading during news releases. He was targeting specific times during the day, take 2-4 trades for 3-7 pips and then take couple of hours off. Great deal of skill and a pleasure to watch.

So before we end this interview, there’s just one thing I have to ask: If you won $10 million in lottery, would you still trade FX?

Oh, yes. It is challenging and can be rewarding and, frankly engrossing. Not in the same way as gambling (some could say that there is a very fine line between the two), but still consuming. I see it as puzzle with new pieces always added, thus never finished. It is difficult to see myself not trading, even if only on limited basis.

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I hope that the it was useful to you. Please use the comment form below to send your questions to Mike and also post your feedback and visit Mike’s blog.

Thank you Mike, thank you fellow readers.

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