Forex Speculation?

Have you ever wondered what is meant by the term speculation?

It seems to be rather loosely defined.

Speculation is the process of selecting investments with high risk in the hopes of making a profit due to price changes. Apparently, if you use that which you purchase, such as consumption of a commodity, or if you purchased something in order to profit from dividends or interest rates, then it isn't speculation.

So, in summary, if you buy a financial instrument in the hopes that you will profit from a change in price, you are speculating. Obviously, forex trading is a form of speculation.

According to Wikipedia, speculators provide a valuable service to markets by adding liquidity. This allows the market to operate with more efficiency and it allows lower spreads between buy and sell prices. Or, in Forex terms, it allows a lower pip spread.

Are you interested in being a forex trader? Look around and read my blog. I write about my trading experiences as a Forex speculator so you can learn from my mistakes -- instead of making them yourself.

Forex Trading Made Easy

Are you kidding me? Forex trading isn't easy, it's about as risky a financial endeavor as you can legally participate in.

Wait, let me rephrase that... foreign exchange trading is easy, success isn't. Yeah, that's right, that's my tag line. It's true.

If you are looking for the easy button, here are some platitudes for you:

• Buy low and sell high.
• Have inside access to national economic reports.
• Witness a major international incident prior to the news reports.

If you are willing to work hard, be patient, and work to preserve your capital, then here are some more helpful suggestions:

• Wait for a buying opportunity before entering a market.
• Manage your risk via position size and stop loss orders.
• Learn to recognize when you should not be trading.

Waiting For A Buying Opportunity
If you don't know how to recognize a buying opportunity, then you need to be playing with funny money still. Perhaps there has been a big movement recently. Perhaps there is a news release on the way. Perhaps you have noticed a trend and your indicators are giving you signals. Whatever the case, don't just throw your money at the market and hope for a profitable move.

Managing Your Risk
It's easy to get fully invested. Heck, if you are careless you can do this in one trade. If you aren't careful you can blow up your entire account within minutes. Sure, you do have to take a risk every time you enter the market, but you don't have to take huge risks in order to achieve significant returns on your money. Make sure you are around for the long haul because eventually the market will make a move in your direction.

When Not To Trade
Generally, when you are having a bad day, whether because of the markets or otherwise, it is a good time not to trade. If you are bored, stressed, emotional, desperate , depressed, or angry, you are very likely to make poor decisions. All it takes is one unlucky rash decision to lose your capital. The forex trading game is one that requires vigilance and discipline. Know yourself.

Anyway, today is Sunday, so I can't trade just yet. What do I do on Sunday? I think about potential trading strategies. I look forward to the day when I have real capital in the markets and am making a serious income. I review my previous ill fated forex trades. I write in my blog.

Unplanned Forex Setback

Well, things have gone poorly just lately. Not because of anything that I've been responsible for, but because I was the recipient of an "insufficient funds" check. As the money I was planning to use over the holiday period was rudely removed from my account I was forced to withdraw a large portion of my Forex account.

I'm quite peeved!

Especially since I had some good in-profit positions protected by a stop loss. After I had to unload for a small profit the market continued to rise for a couple of days. Of course, if I was still in during the Thursday evening sell-off, I would have been taken out for sure, it still would have been at a higher profit level.

Oh well. There isn't much I can do about it. As it is, I'm searching for a job and hoping to soon be playing the Forex in a serious way. Up until now I have only been working with an extremely small capitalization. Upon resuming my career, which I expect to happen early in the new year, I'll be able to accumulate a reasonable stake and put my recent "education" to work.

US Durable Goods / Jobless Claims

The numbers came out weak this morning.

While it appears to have caused some initial softness, I think we should keep in mind that a weak US economy gives the Fed additional room to lower interest rates without fears of inflation.

So, personally, I might consider buying into weakness...

AUDJPY With Bollinger Bands

Lately I've been trading the AUDJPY using only an EMA (exponential moving average) and SMA (simple moving average). The theory is that when the price is below these averages it will at some point return above it. This is generally true, even during a downturn, but especially so during an upturn.

I have been seeing some success with this, but it does have me hanging onto losers for some period of time, so that they again return. I continue to have trouble dumping a loser as soon as I recognize it as one... and it is probably something I should be working on.

In any case, I've added Bollinger Bands to my 5 minute chart. It seems to give an indication of when a price movement has reached the limit of movement with respect to recent volatility. While it is always important to realize that the past does not guarantee the future, it does give you an indication of timing with respect to entry and exit points.

Again, keep in mind that I am happy to accumulate carry positions in AUDJPY. This greatly colors my strategy and how I trade.

AUDJPY Overnight Upswing

Cool.

I'd been getting into the AUDJPY pair during most of the week. Now, most of my small nibbles have been taken out on the way up, at a profit, while I've sunk some larger carry positions about 120 pips below the current price.

I like that!

Anyway, as you know, it's very hard and dangerous to bottom pick, but if you don't mind accumulating some (manageable) risk, then you can (hopefully) eventually reverse your losses and grab some profits and some carry positions once the market does finally come back to you.

The hardest part is to hold onto positions after the floor has dropped out from under you, again and again, on the way down. When the market rises while you are sleeping, you don't get the chance to get nervous about your profits... but you can set healthy stop losses afterwards -- and hope for a major uptrend continuation.

That is where I am right now. The market has opened and if the DOW decides to shoot up today, which it could, then I'll be smiling. If not, I don't mind hitting the stop losses and banking some respectable profits.

Good luck out there!

Timing Market Entry

I've noticed that the Forex markets move both fast and slow.

If you are busy sinking money into some carry positions, the market might suddenly decide to go sideways, or perhaps down, for the next week. So, you go underwater and don't get to lighten your load on subsequent upswings.

However, if you are light in the market, a piece of news will drop and leave your jaw on the floor as you miss out on a quick 100 pip swing. Obviously, if you play the news, it will come in on the wrong side or the market with interpret it in a way that surprises you in order to throw you under the wheels of the money train.

In short, it's not easy getting into the market safely with any quantity of net asset value.

The problem really arises when you take small bites, getting into the market without risking all that much, and then find out that you were wrong. The market will wiggle around a lot, near your entry price, enticing you into thinking it will eventually recover, and then sink a bit more. If you put in a stop loss, the market will hit that, then bounce back up -- taunting you with a profit that you can't participate in.

It's simply devious.

So, how do you get into the market? How do you accumulate a set of carry positions that are in profit? When do you enter the market? What signals should you be following? As I've noted before, technical analysis of the carry pairs is very tricky, as they are driven by market movements. These pairs are happy to run roughshod over your trend lines any time the markets are euphoric, nervous or calm enough to lure you in.

My suggestion is for you to work out the resistance points. As you approach a resistance point you can see how the pair reacts. If it stops or starts to bounce, you might feel it worthwhile to enter a position. You are basically risking the pip spread plus the distance to your stop loss. You simply have to risk a small amount of capital in order to play.

The key is pick your entry points when you have the best chance of seeing an upturn. It's not easy.

Theoretical Investment Strategy

I like to think about things, twist them around, and come up with theories.

It strikes me, that as long as a market continues to move up and down, such as the AUDJPY, that every time you take a position, you are guaranteed a profitable exit if you are able to wait long enough.

This leads to some interesting theoretical strategies if you are using a trading platform that doesn't penalize you in any way for executing micro-trades.

For example, if you take a small position with a predetermined take-profit setting, then you know that over time you will earn the return you've selected. So, in theory, you can drop one of these positions into the market every five minutes and determine your eventual average earnings per hour.

At the same time, as a carry position, you know you will be earning interest while you wait for the position to close out with a profit.

Additionally, perhaps the best time to embark on this strategy is after a significant unwinding in the carry market? However, keep in mind, that if you blithely throw your money into the market you will slowly end up with a large and vulnerable position during a long term down trend.

An alternative to help alleviate this concern is to buy positions at what you think might be a bottom. Then, if you are wrong, wait until another 100 pips or so have fallen by the wayside before trying again. This will let you avoid getting a large position on the way down. If you aren't wrong, execute a grid strategy, buying a new small stake for every N pip rise.

It seems "wrong" to buy on the way up, but this also limits your total position. You will be taking profit on the lower positions and accumulating new positions every N pips. With the downward and upward strategies outlined above you can calculate your total position and your total drawdown for potential market movements.

As a bonus, this type of strategy would be easy to implement using some type of automated trading platform.

Overnight Trading

As I live in the eastern timezone, I get to trade overnight prior to the NY trading session on the next day.

Last night I was able to settle some AUDJPY positions around 96.7, 96.8 or so. At the moment these are nicely profitable while the DOW futures are simultaneously positive.

As far as I can tell, the US trading day pushes around the AUDJPY based on stock market movements. By this, I mean that any established trend can easily be broken as soon as the stock market does not itself follow any such trend. In short, reading your charts and so forth can be pretty misleading at this time.

However, a potential strategy ensues. There are underlying fundamentals based on both the AUD and the JPY. When the US trading day is over, these fundamentals can start to exert themselves on the AUDJPY pair. So, on a heavy US down day, it might make sense to acquire a little bit and hang onto it overnight. Basically, take a small bet. If it moves against you get out, of course, but if it goes your way, put a profitable stop loss under it and hope for a good day in the US.

This will probably be true as long as the US economy and the world economy are still considered to be different entities.

Personally, I take tiny sustainable nibbles on the ride down... getting a little bit of carry action. Then, from time to time, when it seems a bottom is possible (considering that a downward moving DOW pushes down the pair) I'll jump in with larger positions, hoping for that eventual correction or reversal.

Weekend Forex Thoughts

Although it is the weekend, I can't help but think about trading.

One of the things I've noticed recently is that the EURTRY pair is much less influenced by Wall Street. The DOW is flying all over the place, dragging the AUDJPY and related pairs up and down the charts, while the EURTRY drifts sedately instead.

However, a caution, the EURTRY has historically had some very violent and large moves during unwinding events. You do not want to get caught unprotected during one of those events.

Another thing I am thinking about, as an early idea, is the concept of being strategic with the use of sub-accounts. When thinking about the carry trade it is obviously best to buy into positions when their has been a large drop, over some period of time, and the pair in question seems most likely to start drifting back in the direction of it's natural inclination.

Sub-accounts could allow you to segregate buy and sell activities by price range. For example, if a pair you are trading has historically had a maximal total movement of a couple thousand pips, then you might create sub-accounts with fixed amounts of capital and execute trades in them when the price is in a range that corresponds with a particular account. So, account ABCXYZ100 would be used for prices at or above 100.00 while account ABCXYZ090 would be used for prices between the 100.00 and 90.00 points.

This gives you a segmented absolute limits and the ability to fire and forget, since you won't have to look at the sub-accounts or wade through the open positions every time you look at your main account. I don't know, I certainly haven't put any serious thought into it, but don't discount the ability to "fool yourself" or "avoid" seeing things that could have an emotional impact.

Hmm, something else I've noticed, it's hard to reverse trades when you've been following a trend for a while. When it does turn, it is very easy to get caught trying to trade the previous trend -- which of course is costly. In this case, it's easier to start trading against the previous trend using a sub-account. In fact, it's also necessary, as a counter trade generally take you out of the countering position. Just don't go crazy straddling the pair as there is no point in doing that either.

AUDJPY Reversals

Wow, what a roller coaster!

Yesterday saw a massive downturn, followed by this morning's upturn... and then a slow fade back down during the day.

I'm happy to report I was able to recoup my losses from yesterday on the upturn, and then incredibly was lucky enough to unload near the peak. Sweet.

As you might understand, I'm a little nervous about committing capital to the market at this point. However, prior to the elephant known as the Fed getting involved, the market had been fairly well behaved and apparently establishing a bit of an up trend. At this point, who the heck knows...

Recent Non-Success

Today's fed announcement caught me with an unprotected position. Needless to say, as the floor dropped out of the AUDJPY market, I was given a bit of an unpleasant ride.

However, I didn't blow up my account, so hopefully things will settle down and drift towards "the middle" so I can get out without too much pain.

Recent Success

Well, it has been a few days since then, so I can't remember the full details, but I was able to catch an up-trend with a significant amount of my net asset value slipped in.

Basically, when an initial foray is in-profit, I'm ready to put in more when the trend seems apparent and things are acting rationally. So, after a few ups and downs, perhaps within an up trend, I could have accumulated several slightly profitable positions.

If this continues for a while, it's easy to get a large portion of your net asset value into a situation where tiny profits are locked in (stop losses set above the entry point). Then, if the market doesn't drop low enough to take you out, or perhaps a news event occurs in your favor, you can grab a large profit over the next hours or days.

In any case, I like to do this with AUDJPY, buying in during an uptrend, willing to let some carry positions accumulate until the market decides to either reward me or close me out because of my protective stop losses.

I am thinking of looking at some other currency pairs. The carry pairs seem to be closely driven by the stock markets, and hence have an awful lot of volatility, whereas some other pairs might be a bit more manageable.