Saturday, January 30, 2016

Decide Long Term Direction of Currency, Trade It Until The View Change

Long term can range from weekly to yearly. I had a look at the market I was interested in and decided where this market should go given the current situation. Take the US market for instance it goes through waving interest rate expectations. At the moment the expectation is flat with a very small bias for higher rates. Now look for a market where the expectation is for increasing rates...there you have a long term view - for as long as your view of interest rates in these two locales stay the same the currency should be traded in a single direction. So you try and trade in the direction of the long term. Yes the carry trade unwinding would have been very scary on the yen but I was not into trading anymore and as far as I can see much of it has been made back again. So if you had a feel for that market you probably would have stayed out until the unwinding talk was finished and started building your position again. Now when will my long term view change...well either the economics must prove it (news items) or the market must drop below the carry trade scare level or Japan must surprise us with a sudden rate hike. REMEMBER how surprised everyone was a while back when the GBP unexpectedly raised rates when nobody expected it? Look where it is now against the USD - great long term view example and great example of trading in the direction of the long term view...yes it did indeed take a while and it made some pullbacks but the view was right IN THE LONG TERM!

To trade this view on a daily basis is complicated but the more cash you have the easier. Think about it in this way. If you believe on the monthly chart that the market is moving higher then given 20/21 trading days in a month then surely for the month to end a BULL (open lower than close) then out of this 20 days at least 1 day must close higher than the highest open of the entire month up to that point. So even if you just sit and wait until you see a nice pullback on the dailies and then start going long then sooner or later you will see the bull trend resuming. The secret is to start your posi normal and then as soon as it goes against you by your tolerance to cut some of it and as soon as it starts going your way to add more and as long as your direction is confirmed you add more and more, until you are at full limit by the time your view is confirmed. I have so many times seen newbies take a few pips profit just to feel good about making a profit while they add to a loser or even let it go against them big time and then start adding to the loser...I have seen nobody make money in this way yet...

I typically took about $500 a pip position and if the market goes against me by 200-250 pips i would cut 1 bar then every 100 pips down i would cut another 1 until either my position is closed or it goes back in my direction i would add $200 a pip to my position every 50 pips in my favour. If you can get the overall larger trend right then you can make money this way. Just note that these values (200 pips 100 pips etc) are not absolute values I might see ranges that I like and these might be 400 pips away so I might take a smaller position initially to ensure I can comfortably sit until those levels are reached should my position be wrong. So I dont get squeezed out of a position. This cause about 10-15% drawdowns when calculated against budget to be reached. Its not always easy and sometimes its just better to wait and see...I however liked to be in the market as much as possible because then you really focused on where it is. Not trading with my own money made it very easy to throw a line in the water just to see what would happen. Many a time that was the start to a great trade and sometimes it went against me but still managing it properly reduced the loss, although still a loss. It wasn't my money...that helped a lot. So if I can be permitted to give another piece of advice to newbies: DONT TRADE WITH MONEY YOU LOVE.

I once tried to explain to my wife how it feels to trade, how it feels to make money and to lose money. I went to draw some crispy $100 bills at the bank and told her to get the same amount from her own account. I told her we are going to play a bit of heads and tails tossing a coin. If she wins she gets one of my hundreds if I win I get one of hers. She won 3 times in a row and was smiling from ear to ear taking $300 off me, promising me a great night for being so generous! Then she lost, I took $100 from her and promptly tore it to pieces. She was sitting there open mouthed. The look on her face was nasty: "What the ...k are you doing? Thats my money!" I explained to her that no, in fact, it was still some of the money she won off me, and asked her if she wanted to continue playing? She looked at her hand of bills and took the 2 remaining bills that she won from me and put them seperately from her stash. She wanted to continue but clearly now she had a plan. I won again and ripped it up then she won 3 times in a row and was smiling again. She smelt money! Then I won it all back and continued ripping it up. Now she only had her own stash left. I asked her whether she wanted to continue and she said yes after almost starting to cry due to her total involvement in this "game". I asked if she was going to answer her cellphone ringing for the third time...you can imagine her answer. I won again and ripped into the first of her $100's. She started shaking. Shame. She won and I could see the smile coming back. She lost another 3 times in a row and was begging me to stop ripping the money and to please give her back her money...She suddenly understood what I went through on a daily basis. Expensive exercise but at least she understood me better and it helped our marriage a lot. Dont do this exercise with $1 bills it wont have the same effect :-))

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