Recent Forex Efforts

Since the recent yen cross meltdown started I've been trying to keep from getting caught on the wrong side of any massive downward moves.

As I generally trade only the AUDJPY, mostly on the long side, things have been pretty quiet!

However, we are now facing some resistance at 74.50 on the 1hr -- which should be illustrative. We have done what might be a triple bounce off of support in the vicinity of 70.90 or so too. I'm thinking we may have another downturn to confirm support but we could certainly get right back to business without it.

In any case, as the market is starting to act rational, I'm just about ready to start trading according to my own particular style.

Monster Scalps With AUDJPY

I've been shamelessly scalping the AUDJPY this week (via Oanda). It may be hard to fathom, at least when you see the numbers, but I'm not entirely happy with my results.

Jun 28: 00.28% NAV+
Jun 29: 06.65% NAV+
Jun 30: 11.66% NAV+

So far this week, if I can hang onto it, I'm up over 19% on my trading account.

Now, you may be wondering why I'm not satisfied with my trading. Basically, I've made too many mistakes. From time to time my discipline is lacking and I jump into a position at what is realistically an unwise entry point.

This keeps me from capitalizing on later opportunities until I've extracted myself from the position foolishly entered. It also subjects me to a lot more stress while I wait out moves on a larger timeframe.

Anyhow, I've decided to quit fooling around, scalp myself a decent stake, and get serious about trading. Now, if I can just work out my discipline issues I'll be set.

Alert: AUDJPY Head And Shoulders?

I've spent most of today scalping the AUDJPY (on the long side).

Jumping up to my 3hr and 4hr charts, as I have two platforms running, I see an upside down head and shoulders.

You may want to take a look at this and see what you think.

Back From A Trading Break

Well, it's been a while since I posted. Things have been hectic, but I did just take a short vacation. No running water. No cell phones. No internet. No trading. There were, however, lakes and fish.

I think I'm ready to do some serious speculation at this point... as long as the market behaves.

Hopefully I'll soon be posting and tweeting up a storm!

We'll see.

Long Term Carry Trade Fundamentals

While reading a recent CNBC article about current events something clicked for me.

Here is the passage:

The dollar rose broadly on Thursday as yields on 10-year U.S. government bonds jumped more than 50 basis points in the last two weeks, drawing Japanese investors into overseas assets like global semi-conductor stocks, banks and U.S. junk bonds, according to Reuters.

Do you remember the massive unwinds that occurred during the past year? Do you remember all the talk about money heading towards Japan due to risk aversion?

Pay attention, this is significant. It's also backs up my much touted long term notion that carry trade currency pairs are in for a recovery.

Given the quote above what do you think will happen once the jobs numbers start to turn around in the US economy? I'll tell you what I think. I think interest rates and yields will start to rise. What do you think all that money sitting in Japan will do if there is a hot US economy paying good yields? I suspect that it will leave Japan in order to earn good returns.

Guess what that will do to the Yen? That's right, it will drop like a stone. When that happens you'll see carry trading pairs rise massively.

Okay, I realize this may be a year to two away, but as long as we do eventually get a worldwide economic stabilization this is what is in store for us. Anyway, if you are a rookie, be careful, as you can't simply make long term bets willy-nilly. The market can always move against future expectations long enough to blow up your account and it often does so as soon as you throw caution to the wind.

What this means for me is that I may be more willing to accumulate carry trade positions at moments of opportunity. Keep an eye out for fundamentals and watch leading economic indicators such as the Baltic Dry Index or the price of copper.

As you can see these indexes are rising. However, they are still at historically low levels. Are we just in a bounce with respect to worldwide economic activity or are we simply coming up from a recent bottom? You decide.

Twitter Forex Tweet Strategy

Have you been following people involved in fx trading on twitter?

Have you noticed how many people are happy to tell you what happened? While macroeconomic news and previous day post analysis can be useful, it certainly doesn't help you make a trading decision based on current charts.

I have a little proposal to make.

Instead of tweeting that you've opened a long or short position provide some information that other people can use to apply their own strategies. Frankly, I don't care what crappy decisions others are making. I care what the charts are saying. I'll do my own technical analysis and decide on my own trades.

So, tell me that a pattern is forming on a named pair's chart in a certain timeframe. For example, right now the AUDJPY is retesting May highs of 76.00 and obviously this is true on any chart -- though you may need a longer chart to actually see it.

Then, I can whip open my chart, draw some lines, figure out a strategy, and trade on the opportunity.

To summarize, we need to tweet about opportunities that are shaping up. We need to just drop each other a note that something is happening. Anybody who has traded for any length of time can figure out what to do -- but unless we have the luxury of trading full time we just can't spot all the opportunities.

In short. Smarten up and stop trying to show the world how damned smart you are. We don't care!

How about we call this the Useful Forex Tweet Agreement (UFTA).

UPDATE: I've tweeted the AUDJPY information (again) using the #ufta tag...

Forex Tips - Microtrading

The AUDJPY currency pair is currently trading around the 76.00 mark.

Over the last twenty days, from May 7 through May 27, I've been experimenting with a concept I've been calling microtrading.

I don't intend to close all of my positions at the moment, but if I did my account NAV would increase by more than 10% over that period.

While I realize that active trading can return spectacular results compared to a paltry 10% it does require a lot more effort and time. Personally, my full time job and other issues have my complete attention. I don't have the luxury of time or the mindset to take larger risks at the moment.

Anyway, open up your trading platform and I'll walk you through the process of trading this strategy.

1) On May 10 we topped out around 76.00 on the AUDJPY pair.

2) Based on my account size I could safely open long positions for every fall of 20 pips. This isn't the goal but it is the maximum density of trades I'd allow.

3) As the price of this currency pair dropped to around 70.50 on May 15 I would accumulate positions based on the previous point. Basically, when you see what looks like a support point or if the price moved down a lot while you were at work or sleeping, then you open another micro trade.

4) When any one trade has more than 200% profit with respect to margin committed and you believe you are at a resistance point, consider unloading it.

5) Be patient when the market moves sideways. In terms of serious monetary strategies a week or a month is not a long period of time. Keep in mind that you are trading a carry trade pair so you will be paid to wait.

6) I firmly believe that eventually the AUDJPY pair will recover strongly. I'm willing to hold positions for long periods of time as I wait for this. If you don't believe this or you aren't willing to wait, then this strategy may not be useful for you.

Using the above method, with almost zero stress except for impatience during several weeks of sluggish movements, my trading account never committed more than 6% of it's NAV (using 50:1 leverage which is the maximum at my fx broker -- Oanda). However, this morning, as I've stated above, I could close out all my positions at a 10% NAV gain.

This is a simple trading system, though purists may balk at calling it a "system" due to its loose definition. Wait for a drop and buy tiny positions. Capture large profits when they present themselves. Be patient and don't accumulate too large a portion of your NAV. I'd definitely recommend using Oanda due to the ability to trade any size positions and the fact that you can't trade with extreme leverage.

FX Trading And Analysis

I've become a little frustrated with most of news sources out there. If you've been an active forex trader for any length of time you'll notice that talking heads are always trying to tell you why something happened.

That's really nice, and might possibly help you learn about various financial interactions, but it's absolutely useless from a trading point of view. If you are trading you need to figure out what's going to happen -- not what just happened. Check out this video (complete with atrociously low audio levels).

This type of analysis is unlikely to help you with your fx trading tomorrow. Generally, how the markets will move tomorrow, based on tomorrow's news, is not something you'll get from any of the gurus and talking heads.

On the other hand useful analysis will be too slow to be meaningful. For example, I'm very confident the world economy will eventually recover. When that happens we'll have a period of high interest rates as rising commodity prices drive inflation. Guess what? This will mean that carry trades pairs will end up at much higher prices. Unfortunately, I can't tell you when the world is going to focus on this. Generally, not before the money moves from wherever it is to wherever it is finally going to end up.

The closest thing to predictive analysis, or something you can really use to drive your forex trades, is technical analysis. Charting. Something which gets very little respect in some circles. Many people don't understand it and many others discount it because it isn't able to make perfectly accurate predictions. Technical analysis does not have to be a perfect tool for prediction. It merely has to increase the odds that your fx positions end up earning you a profit.

Microtrading: Decent Returns?

I blogged about this idea not too long ago. The concept is to use very small trades relative to your available margin and net asset value (NAV). I'm doing this with the AUDJPY pair so that when I accumulate positions I am earning a positive carry trade return.

My trade size over the last week has been such that the margin involved in each trade is 0.2% of my NAV. That's tiny. Twenty five trades in and you are looking at using 5% of your available margin.

However, the carry trade interest would represent approximately a 3.65% return if annualized. At the same time my unrealized profits had me up almost 4% earlier this morning. This 4% unrealized profit is due to only the last 10 days of trading. We've had a downturn, I've accumulated positions, and the AUDJPY has jumped just recently.

Anyway, I hope this demonstrates that short term scalping is not the only way to earn money using forex. While this concept won't make you rich overnight the risk is very low and the returns can be good compared to currently available financial instruments.

Theory: Trading With Little To No Margin

As I often do, especially when the markets are excruciatingly slow in determining when to make the next significant move, I've been thinking about Forex.

Take a mental walk with me...

The DOW falls from 10,000 to 5,0000 and loses 50% of it's value. It returns from 5,000 to 10,000 and gains 100% of it's value.

Wait, think about that for a minute. In the normal world having the ability to gain double digit gains, per year, is considered excellent.

If you are confident that an upward cycle will eventually happen, in a suitable time frame of course, then movement is valuable. If you aren't trading on margin, and you don't have the associated risk, then you can afford to look at each dip in price as an opportunity.

While this may be applicable to the DOW, it is ever more applicable to the Forex markets. If you are trading with little or no margin it's simply a matter of scaling your entry and exit based on price moves. This is very similar to the gridding concept that I posted recently.

However, when the margin is gone the risk is gone. You choose the price range you expect and scale your entry and exit points within it. If you must, you leave some positions in place while you recapitalize to attack another range. In fact, perhaps you simply allocate a set number of dollars per thousand pip trading range. If the price falls into a lower range you simple ante up and play within a lower range -- while your higher range positions provide interest income.

However, keep in mind, it's possible that currency pairs adjust interest rate differential. This could erode or reverse the suitability of holding a pair over a long period of time.

MT4 EA: Average Position Based Trading

While I don't have any pictures to show, yet, I am working on an EA that trades AUDJPY based on the market price relative to the average price of positions held.

The first few passes at this type of system were pitiful. My testing starts from September of last year to now while only opening long positions. As you can imagine this is a difficult period of time for a long only system!

However, late last night I was able to complete a test that showed profits.

The strategy behind this EA is basically as follows:

• If you've just seen a recent downward movement open an initial position.
• If the price is high enough above or below your average order open price, open another.
• If the current price is above your average price close your lowest and most profitable position.
• Try not to open any position while in a downward movement regardless of the above rules.

Obviously, the last item mentioned is not simple, but it is the key to account survival. If you open too many positions and the market falls too far you will get a margin call.

As ever, I'm basically using the AUDJPY for this. I am interested in strategies that can accumulate a safe quantity of long positions such that they pay me to wait for the eventual upturn.

I'll provide updates once/if I'm able to get appropriate results.

... continuing ...

Here's a chart showing this:


Notice the wicked looking draw down during challenging periods of AUDJPY decline?