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The rise and fall of European power traders

Updated on March 17, 2012

Luck or skill?

The last decade include the rise and fall of Enron who was very active in the European electricity markets. After Enron defaulted several US trading companies scaled back their European trading operations. However power trading gradually picked up with an increasing number of market participants and trading volume. The market peaked around mid 2008 when oil prices rose to levels above 140 USD/bbl.

In this period the German market changed relatively more than the Nordic market. The prices are trending upwards in the entire analysis period but contain some volatile periods with prices far above and below 200 day moving averages.

Traders apparently made more money in the earlier part of 2000 and in 2008. Generally speaking it is easier for traders to make money in clearly trending market, be it up or down. Germany in 2008 was a year with a clear up trend in long-term power prices in the first part of the year and a down trend in the second part due the dependence of oil fired generation to cover peak demand in tight supply situations. 2010 and 2011 have been difficult years for power traders in Europe. Competition has been stronger than before but also the sharp increase in renewables made it more difficult for the traders to make money. Introduction of electronic trading may also have increased competition. Traders using strategies that historically had worked struggled as these were no longer workable. Therefore a high number of trading companies and banks have laid off people since their operations were unprofitable. Many of the so called star traders are struggling today. How can that be? Are they unable to adapt to today’s market? Were they just lucky and traded in clearly trending markets? One characteristic of these traders was to focus too much on one technique or idea for identifying a trade without acknowledging that the market was changing

There are parallels to the financial markets where most traders made easy money in the bull markets of the eighties and nineties and before the dot-com bubble but struggled to make money in the bear markets of 2002-03 and 2008. Trading in bull markets consists of taking a ride on the back of the bull trend and buying the dips. However, these markets tend to turn the merely bold (and possibly reckless) into market geniuses. The perceived risk in stock market investing had been very low until the dotcom- bubble burst.

One main difference between a good and poor trader is his skills and discipline in money management and risk management.


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