As I Get Better

I probably shouldn't be trading during this period. I know there is thin volume, that moves may not reflect wider market sentiment, and whatever else I should know. However, I simply like to trade. Besides, now that I'm getting better, it's a hobby that can generate an income.

One thing I've noticed though is that I'm still too impatient. Basically, my worst batting average will coincide with my first trades. I simply don't wait for a good enough entry point when my account has been squared. This doesn't stop me from earning revenue or anything like that, but it certainly does limit my ability to do so as I have to be cautious about how much risk I put on the table at any one time.

Because this first trade is most likely to end up under water I am often in a position where I have to extract myself from this trade. For example, over the last few days the market has been range bound. I don't feel any particular rush to liquidate my ill-timed position, but it would be nice not to have it hanging over my activities.

So, as we approach what appears to be the top of our range I will sell a profitable position and then liquidate a portion of my ill-fated trade. Perhaps the ratio will be something like 5:1 in terms of profit versus loss. This means that I'd earn $5 on my winning position and accept $1 of loss on my losing position.

As long as what is over your head is not a huge position relative to your willingness to accept risk, then you can just whittle away at it. Once again, as I discussed in my last post on "extractions", you have to keep calm about things and be comfortable in the knowledge that you have a nice win/loss ratio to take advantage of. Besides, as long as the risk level is kept low, you might just find that the position becomes profitable again before you've gotten rid of it.

Extraction Strategies

Extraction strategies? What the heck is that?

Underwater Psychology
If you are like anyone else you've found yourself in a trade that is going against you from time to time. You start to imagine reasons why the price could continue to move against you.

For example, this morning I was underwater in a position due to the spike in AUDJPY. The price of oil was rising due to the conflict in Gaza, apparently. At the same time, due to the recent break of a long term resistance line I'd expect a long term upward trend. Oh, not to mention that in thin markets I'm unsure how prices will react to these issues.

On my side was the fact that the 5m, 15m, 1hr and 3hr were all pinned at the top of their respective stochastic indicators.

First, keep your cool. If you are entering with reasonably sized positions you shouldn't be facing an emergency even if you expect the market is in a long term trend against you. If you aren't in a panic then look for the ability to work your way back out of your trades...

All At Once
This strategy is fairly ballsy, but when it works it feels really good. Look for indications that the upward spike is coming to an end. Perhaps a double top, long term indecision, stalling at a resistance level, or some other good probability situation. At this point you can acquire another position. You may find this happens more than once before you get an eventual correction. Each time you dip your toe in draw a new horizontal trend line at your current break even point. Pop out when you have a small profit and get your bearings.

Salami Method
While this strategy is less risky, it can be easier to perform once the market establishes a new consolidation zone. As you approach a high in what seems to be the new consolidation zone, acquire another position. As you eek out a bit of profit close your profitable entry, protecting that profit from a market reversal, and then close off a small portion of your losing trades. Over time you should be able to use many small profits to reduce open positions and square your account.

Who Gets Underwater?
Look, though all the get-rich-quick kiddies in the online forums are trying to scalp their way to riches, this is not how everyone trades. These people use positions that are quite large with respect to their NAV and they are not able to maintain positions during periods of loss. With small trades, patience, and an ability to know whether or not it's time to throw in the towel you can survive being underwater quite handily.

The Big Picture
I like to think of the markets being "rational" or "irrational". When the markets are irrational, they are not adhering to your technical analysis. Whether fundamentals, news, or other issues are taking precedence does not matter. What matters is that you look for periods of rationality to make your trades. If the markets become irrational while you are in the pool, don't panic. Unless things are truly horrific, try to wait until the 1hr or 3hr stochastic indicators have gone your way.

This is how I was able to get out of some underwater trades just this morning. With all the stochastics pinned against me, I opened a position at an apparent top. The AUDJPY then dropped like a rock, below my new break even point, and I closed my positions for a small profit.

I don't care if I missed some upside on a continued drop. I believe the market will continue to move upward in the long term -- so I don't want to hold on to short positions for long term gain.

Hmm, another thought. If you are a beginner and aren't able to generate a high percentage of winning trades, these strategies probably are not for you. You have to be able to create winners or else entering more positions will simply sink you further into distress.

Christmas Week Trading Results

Between the thin trading volume and the holidays there wasn't a lot of opportunity in the Forex markets this week.

In any case, I did manage to eek out a 7.5% gain in net asset value.

This has me thinking. If I was to build up an account balance of approximately $20,000 and maintain gains of 5% or more per week then I'd probably be able to think about quitting my day job.

This task seems doable.

However, at the same time, I have no plans to quit my day job. First, I rather like my current job. Second, it's a lot easier to build up a stake while you are gainfully employed and not relying on profitable trading. I'm pretty sure the added pressure would ratchet up the psychological intensity.

Thin Trading Resistance Test

I'm not sure how significant technical events will be with thin holiday trading. However, the AUDJPY tested the long term resistance mentioned in my previous post.

As I write, this pair has been slipping down after what appeared to be a sustained break for several hours (at least according to my chart... over such a large period of time small inaccuracies could lead to misinterpretation).

Which way will it go? Does it matter if we reject a break when trading is this thin? I'm going to guess that as time goes forward the technical importance will increase as nobody bothers to second guess the reasons for historic price movements.

Post Holiday AUDJPY Strategy

Though trading is probably going to be thin until we get into January I think it's a good time to consider trading strategy.

In the short term I expect the following:

• A test of the long term resistance line showing up on the daily charts from around October 14th until now. This could take place around 62.10 to 62.20 depending on how long it is before the test happens.
• I'm not sure it will happen, but we may then get a pull back towards the long term support daily support line.
• If we do pull back for another test of recent bottoms I expect they will hold.

With these thoughts in mind I have the following strategy in mind:

• Whether or not we break out of the long term resistance line now or later it suggests an eventual bounce of up to 1800 pips.
• I am hoping to accumulate some positions between now and the new year as I expect this consolidation phase to break upwards.

Why I expect these things is that President-Elect Barack Obama is going to change things around fairly quickly once he takes office. We will probably see a return to the up-tick rule, possibly the elimination of leveraged short ETF's (Exchange Traded Funds), a large economic stimulation package, and various other related initiatives.

It's possible that we'll break downward. However, I think commodity prices have overshot their targets already. Major stimulus packages, money supply expansion, quantitative easing, policy changes and the return of appropriate regulation should cause an increase in risk appetite.

However, I am aware, as you should be, that I am very often too early. I see where things might go and expect them to go there, and while they may, it can often take a lot longer than I thought. Whatever happens, I expect the markets to buck like a bronco and make it very difficult to enact any plan with confidence.

UPDATE: It's just after 11:00am and it looks like we are moving towards a test of the resistance line mentioned above...

3:00am AUDJPY Upswing

Once again, upon waking in the very early hours, I was able to catch an upward movement in the AUDJPY.

Though the price did come back again around 5:00am and 6:00am, I certainly wouldn't have been awake to catch those moves.

So, strange as it is, I unloaded my positions to the tune of a 1% gain in NAV (Net Asset Value) and went back to sleep all squared away.

Happy trading! Zzzzz.

A Pop And A Drop

In my last post, where I gave an audible AUDJPY signal, I suggested that we were coming up to a decision point for the AUDJPY.

My take was that we'd see a drop.

It took some patience, but after carefully accumulating a few positions on the way up I was rewarded with a nice quick profitable drop. While I would have done better playing for the pop and keeping an eye out for signs of a drop, I really don't mind.

Maybe next time I'll play it better, but as the saying goes, all's well that ends well.

AUDJPY Signal

Okay, this isn't really a signal, but what the heck. It looks like the AUDJPY is positioned to head downwards on the 3hr, 1hr, 15min and 5min charts.

Yes, yes, I know. It doesn't actually mean it's going to do that. However, this does mean it's a good time to do your own technical analysis and see whether you see a reversal or a breakout.

Either will do.

Adjusting My Risk

Though I'm very happy to report great earnings progress it also makes me nervous. Not only are my these recent gains a hard act to follow but now I need to adjust the size of my trades.

Enter the arena of trading psychology.

Trading larger amounts let's you see losses and gains adding up faster. It's harder to resist the emotional forces generated.

So far this week I've been a bit hesitant and under-sizing my positions. I'm concerned that as soon as I increase my trade sizes that I'll hit some losses and lose confidence.

What the heck is that about?

Recent Trading Results

First, some recent results:

Week ending 28-Nov: +23% NAV
Week ending 05-Dec: +08% NAV
Week ending 12-Dec: +10% NAV
Week ending 19-Dec: +45% NAV

This is silly! I'm going to outline some of the events that transpired to help this happen.

During the week ending 05-Dec I acquired some AUDJPY positions in the 58.xx price range. I had a nice trend line indicating that this was likely to be a support point and it turned out to be one -- several times.

Considering the bottom relatively safe I would buy other positions at local lows... making sure to leave enough room for a retest of the 58.xx lows. Obviously, this was quite risky, but at the time I did not have significant capital in the account so I didn't mind risking some calamity ripping the bottom out of the AUDJPY.

So, with that in place, I'd track where I'd bought and sold positions, slowly lowering my entry points and average position price. Then, later, as we all saw, the price spiked massively and pushed all of my positions into a sizable profit.

I don't know if this is something that I'll be able to repeat. Some reasons include increasing my NAV to the point that I'm not as willing to take risks, trying to execute a swing trading strategy which makes it difficult to accumulate positions, and the difficulty in developing confidence in a bottom point.

Finally, this was a challenging week. With the wild gyrations taking place every time the auto bailout shifted sentiment it was difficult to jump into the market. Who knows if a massive spike or drop would go against a current swing trade? While I am a fan of volatility, I've realized that it would be nice if it the market wasn't actively volatile all of the time.

Trade well.

Yen Cross Spike

Guess who was lucky enough to wake up at 4:00am this morning?

At around 4:20 there was a massive spike in my AUD/JPY holdings. I'd accumulated some positions on the way up from 58.xx and unloaded them as it made a 63.xx rocket launch. Checking out my news sources it seems that various stops were triggered. Given that market conditions were thin the price went nuts.

Anyway, though my open trades had been hampering the idea of swing trading, I've cleared my plate realizing a 36% one day NAV gain. Holy crap.

I have to say it was hard to unload my positions while the price was going through the roof... but now, as the price dips, it was obviously the right move.

Where To Go From Here

While I'm getting fairly comfortable with my ability to trade I'm not sure what to do with my blog.

To make my blog really useful to others I'd have to spend a fair amount of time on it. Perhaps post charts and so forth with explanatory text. Heck, I have trouble finding time to blog at all given the duties of my full time job, some hobbies, family responsibilities and finally watching the markets when I get a chance.

On the other hand, it's possible that I could generate "opportunity alerts" in some type of semi-automated fashion. I could neglect to make a prediction on direction but simply post to the blog when a key price point had been reached. The value of this is that other traders could fire up their trading platform, analyze the situation, and take a position without having to wait around for something interesting to happen.

Then, one the other hand, if I'm able to do that, why don't I go out and make some type of expert advisor (though I don't trade with a broker that uses that type of trading platform) and let it do my trades for me.

Catching A Bottom?

I don't know if it will really be the bottom, but I've managed to sink a decent amount of long AUDJPY around the 58.00 mark. There was a long term trend support line right around that point and I went with it.

There are two separate positions at that point. Both of them have a protective stop loss slightly above their purchase price.

Thought I've been having fun picking off a few pips here and there, this is perhaps the first time I've been able to jump on a perfect setup and sit around with hundreds of pips in the pocket.

Now I have to figure out if I should unload these positions or simply hang on as the AUDJPY may be at the beginning of a multi-month upward movement. Of course, if I am wrong, I could kiss my recent gains goodbye as the market searches for another low...

Trading Results: AUDJPY

For the week ending Fri 05-Dec-2008 I managed scrape out an 8% increase in net asset value.

This week was more challenging, for me, than last week. I seem biased to seek opportunities with gains on the up side. So, on a week with sideways trading and periods of downward drift things slowed down.

However, as always, watching my own trades brings insights that might be useful to other traders.

For example, I've found that momentum indicators can be quite useful. They measure a different aspect of performance and thus they can give you an independent look at the state of the market. However, my favorite indicators are still the stochastic variety. If you take the time to tune them to your time frame they can be quite insightful -- as long as you remember that no indicator is perfect.

Next week we may hear some good news concerning the US auto bailout. If this happens perhaps we'll have some upward market days and some increased risk appetite. This would give me the upward movements that I perform best on. Does this concept remind anyone else of the phrase... "a rising tide floats all boats?"

I consider it important to get equally adept at dealing with up side and down side markets. Otherwise, a significant market move that works well with my own bias may fool me into thinking I know what I am doing. Actually, I'm really trying to warn you to keep an eye out for this in your own trading... and I'd hate for you to gloss over this fact because I seem to be talking about myself.

AUD/JPY Trading Week

Well, the last couple days weren't as good as the first portion of the week, but they were still positive. I'm not complaining!

Thursday and Friday were positive by 0.4% and 1.1% respectively. So, for the week, that gave me a NAV gain of 23.2% in total.

If you've been following along you know that I only have a tiny total account size. However, the current plan, now that I seem to be able to generate profits, is to grow the account to a meaningful size.

Honestly, my account will have to grow by an order of magnitude, and then double after that, before I could expect to drive revenues that would replace my income. While that might take a few years I really am not in a rush...

Let the trading week begin!

AUD/JPY Trading Review

Guess what. Some of the books that I bought have had an impact on my trading. I know, I hear the phrase "No shit, Sherlock" echoing out there. However, so many of the Internet generation want everything to be fast, easy and online that I just have to stress the value of more formal information.

I bet you'd also be surprised to hear how many traders are starting out in their teenage years. It's just another Internet game to them!

Anyway, if you are a crusty old bugger, just bear with me as I talk about things that any sensible trader should already know.

So, back to the topic at hand, my trading week. No, better yet, my illustrious trading week. Here's the scoop:

Sunday Session: +4.1%
Monday Session: +7.7%
Tuesday Session: +2.9%
Wednesday Session: +4.5%

While today isn't over I did go flat not too long ago. Obviously, I may do some more trading before the end of today's session.

Anyway, something to think about. I'd do better if I was more patient. I find myself jumping into the market and then waiting for it to go against me a little before turning around and going where I expect it to go. I guess I'm always trying to get the jump on the market and not waiting for confirmation.

Sigh, more homework.

Forex For The Small Speculator

Today was a banner day for me... trading the AUD/JPY with a return of more than 10% NAV. The market simply walked up and down my trend lines bringing me profits with every pass. How come this doesn't happen more often?

Anyway, as a small time speculator I thought I'd outline some issues that we face compared to some of the larger traders:

• We trade in very small lot sizes
• To make any meaningful revenue we may trade with a large percentage of our NAV.
• Carry trading strategies may be meaningless

Each of these issues is something that we need to think about and potentially make some adjustments to compensate.

Small Lot Sizes
If you want to trade in small lot sizes you need to find a broker that doesn't charge you an arm and a leg for the privilege. I trade at Oanda and they let you trade with any lot size without any adjustment in spreads. I recommend them and I'd give a referral link if they had an affiliate program.

Trading Large NAV Percentags
There is nothing wrong with trading a large percentage of your NAV as long as you know what you are doing. It's a problem if you are trading this way because you keep acquiring positions as the market moves against you. It's okay if you take a measured defined risk because the market has entered a condition that you have decided represents an opportunity. It is very important to get out of losing positions once you know that your market position is unfounded.

Carry Trading Becomes Useless
If you only have hundreds of dollars in your Forex account, then there is no point trying to take advantage of carry trades. If the market didn't fluctuate so much it might be worthwhile, but in all likelihood you'll make a few bucks here and there and end up wasting your time. So what if you make 200% over a year, you still only have several hundred dollars in your account.

Concluding Thoughts
When you are trading relatively large positions relative to your account size, it can be exciting. You'll quickly win or lose tens of percentage points. If you are good you'll be able to build up a bit of a nest egg before too long and then start trading more appropriately for the size of the account you've built up. Quite simply, as your account gets larger the need for large risks dissipates.

Get out there, take your time, make sure the market sets itself up for you just right, and then stomp around and rip a few dollars out!

Getting A Forex Education - Forex Books

How many of us in the Forex market simply jumped in the market and started trading? I know that was my path. I tossed a few dollars in an account and figured losing it would be a paid lesson in how the markets work.

I can't say that this hasn't been a valuable path. I've learned some good lessons along the way:

• it's important to let go of losses early so you have enough capital to sink your teeth into an opportunity that does work.
• No indicator or strategy has all the answers -- stop looking for the holy grail of trading
• The market can easily whipsaw you to tears if you aren't careful
• If you place close stops they will often be taken out before the market goes your way

Really, the list of anecdotal learning is endless and difficult to put into words. However, I recognize that this isn't enough to make me a successful trader, though from time to time I'm starting to taste success. It's finally time for me to bite the bullet and learn more about trading.

No, don't worry, I'm not going to buy some silly multi-thousand dollar Forex training course. That would be stupid. Forex trading is very related to trading in general and there is no shortage of information on either subject. To make a long story short I've purchased four books recently:

• Currency Trading for Dummies
• Swing Trading for Dummies
• The 10 Essentials of Forex Trading
• Technical Analysis for Dummies

All of these were available at a nearby bookstore -- so I didn't have to order something online and wait for delivery.

More importantly, let me list the credentials of the authors of the above books. Respectively, they are:

• Mark Gallant: Chairman and founder, GAIN Capital Group. Brian Dolan: Chief currency strategist, FOREX.com
• Omar Bassal, Head of Asset Management, NBK Capital
• Jared Marinez, FXCHIEF and founder of The Market Traders Institute, Inc.
• Barbara Rockefeller, International economist and trader

My advice? Never, ever, fail to look for the ideas of experts. Even if you don't agree with everything they say, which is appropriate, they should be able to increase your understanding and improve your own thinking.

I've had some days with a NAV appreciation of 10%, 20% or more. I'd like to have a lot more days like that... and I don't think that online sources created for the purpose of flogging affiliate commissions will do that for me.

Overnight Rally

I like to imagine I am in tune with the markets. My trading record may not agree with this minor flight of fancy, but nonetheless, it's much more rewarding to have a feeling of control.

This morning, waking up much earlier than normal, I thought I'd take a look at the section of the Forex world that I follow... the AUDJPY.

Aha, not only did we have a nice rally -- an echo of the DOW futures up by several hundred, but according to my chart it was the perfect time to take a nip. It looks like we're about to push above 58.70 and start another leg of upward movement.

It looks that way to me. Be warned, mileage may vary.

UPDATE: We have the upward break so now the question is... will we break 59.50?

UPDATE: We're around 50.20 right now... it looks like a test of ~59.50 is imminent.

UPDATE: We've just had a quick push up to ~59.50 and now it's slightly above...

UPDATE: I'm taking my profit... it's time to get ready for work and it looks like it's time for a down leg.

Financial Aid Kicking In

As if things weren't confusing enough. Now we have various types of aid programs starting to impact the credit markets. No, the TARP program doesn't seem to be rolling just yet, but commercial paper facilities and other programs are now active.

What does all this mean?

To me, it means this. If the world collapses your money doesn't mean squat anyway. We'll all be living off of mushrooms grown in our basements as we hide from our neighbors.

However, no government is going to allow this to happen. So, while we are watching wild hysteria and so forth gripping the world, it's a mistake. In the financial sense it's always a mistake.

Does this mean we should jump in?

No, it doesn't. The markets, and the world, have the ability to stay irrational far longer than any leveraged entity can remain solvent if caught on the wrong side of a financial prediction.

Damn. A quandary. I hate quandaries.

Look, as always happens, we are seeing panic drive down equity values too far. We are seeing currencies and commodities being hammered mercilessly. These are being driven down too far. It's not the end of the world. This too shall pass.

AUDJPY Revisiting Lows

We're down below 63.00 in the AUDJPY market (as I type -- it may bounce).

This appears to be a test of the 5+ year low for this pair... google charts. Are we ready for a bounce and the much awaited eventual upward trend?

Obviously, I have no idea. However, you can be sure I'm sitting here watching the price action as I type.

Right now, we've bounced a bit and are setting up for a possible "tweezer pair" on the 15m chart. I'd consider that bullish if it happens and gets the expected reaction.

UPDATE: 11:15 has passed, we have two tailed candlesticks near the prior bottom, but I don't see the market rebounding as of yet. I have a small long position with a short stop loss very close to the bottom and, honestly, I wouldn't be surprised by a false downward stab to take out my position before any sustained upward movement.

UPDATE: 11:24. We've pushed down a few extra pips, but we haven't snapped through the resistance at this point yet. With a long position on the table I'd like to avoid pushing an extra pip or two as it encourages the bears and increases the risk of overcoming available support.

UPDATE: 11:30. We moved back and forth between a tailed candlestick and closing near the bottom of the candlestick a few times. We ended up with another reasonable tail length -- I guess I shouldn't be calling them "long tails" per se. In any case, if we can get a bit of upward movement after these failed downward pushes it might scare off some bears.

UPDATE: 11:33. I really shouldn't be watching if I wanted a stress free life, but I've got a stop loss in place so this is no big deal. Anyway, we're pushing downwards again, and I'm hoping we can stop a few pips short of the last downward push. Extending by a pip here and there, as we just did again (11:34), greatly raises the risk of a downward breakout. And here it is.. how far will it go?

UPDATE: 11:38. I'm not sure where we can expect to go right at the moment. I'd say that if we don't have commodity prices recovering and/or we don't have global markets moving upwards then we can expect further downward movement towards some as yet to be found bottom.

UPDATE: 11:59. We have what looks to be a nice long tail on the 1hr chart. This could be an interesting development.

UPDATE: 1:27. Another downward break. Presumably not a surprise to most!

Betting Against The AUDJPY

Well, with commodity prices spiraling down the toilet, it's a good time to be short of the AUDJPY.

Look, put an SMA 20 on your AUDJPY chart. Load up the 1HR or 3HR chart. What direction is the simple moving average going?

That's the trend.

So, if the trend is your friend, what's the best direction to play?

You guessed it in one... down!

If you know how to draw a resistance line, or to put something like a CCI, Williams %R or even possibly a stochastic or RSI indicator then you should be able to pick relative high points to pal around with your friend the trend.

Heck, even the SMA or a set of Bollinger Bands will probably do the job.

Really, it can be that simple, at least while you have a clear trend.

Get your trades on!

Trading The AUDJPY

Things are looking much more even-handed today than I've seen in a while.

In fact, I was so impressed by the fact that the AUDJPY was following my charts again that I decided to do some trading today. While my account is very small, allowing me to be a bit risker with my trades, I did manage to scoop in about 3.5% of my account's NAV (Net Asset Value) by catching some nice movements.

Why am I trading the AUDJPY?

I guess the best answer is because it's what I know. Or, in other words, because I can.

Tune up those charts!

Fundamental Market Conjecture

Be warned that for some reason I remain a perennial optimist.

It strikes me that a lot of the current analysis is based on credit spreads and other esoteric measurements with an eye towards what current values would have implied during past periods.

I'm not saying that this analysis of fundamentals is wrong, but consider this for a moment. Every time something surprising happens we end up looking backwards and seeing an obvious exception to rules that everybody had been following.

If you don't know what I'm talking about think back to the great depression. It taught us that the government should not greatly restrict money and spending during tough times -- or else. That event greatly advanced our thinking and until recently we had constraints on capitalism in order to protect ourselves.

So, what, if any, shaky assumptions are we all basing our fundamental analysis on?

I wish I had some concrete ideas.

What about adopting the T. Boone Pickens plan? Pushing that amount of money into natural gas, and the companies and employees that would produce it, would be a tremendous economic stimulus. Think about it. Instead of throwing money into the ocean to pay for foreign oil the US would be paying it's own citizens to produce energy resources. Those citizens would get off of the unemployment roles, spend their money on goods and services and even pay taxes.

The analysis on moving from oil to alternatives has not taken into account the tremendous effects of the velocity of locally spent money.

Hey, what about winding down war time spending and bringing home the majority of the US troops abroad? Once again, all of the consumable products and services being purchased from foreign suppliers could be eliminated. In short, it's another way to stop throwing money around the world and stoke the internal flames of the US economy.

Does anybody know if China is still on the map? I can't believe that all the people in China will suddenly stop consuming good and services. Who are they going to buy their commodities from? Just as the parabolic spike to high prices was a gross mistake, so is any reverse parabolic spike to prices well below the bottom of the last parabolic rise.

Perhaps over the centuries we've developed a little bit more investor intelligence? I know, I know, this is hard to believe under the current meltdown, but there are people out there with untold amounts of capital under their management. They are going to be spotting bargains very soon now -- and they can step in and properly capitalize companies that have excellent long term value if the current owners find themselves in a position that forces them to sell.

I don't know what will or won't happen. However, I do know that having a global credit crisis right before an expected global economic slowdown has driven panic to levels that are perhaps unheard of. This implies that market mood will be driven down to lower levels than would be appropriate for either crisis alone. At the same time, many companies that refuse to or are unable to get capital are going to find themselves facing pent up demand -- assuming the end of the world does not quickly ensue.

Maybe.

Market Rationality?

With some major changes happening on a global basis it's just possible that the forex markets will return to rationality.

For example, the Yen crosses (the carry trades) have been taking off like a shot today. I know I've been mooing about a possible bottom here and there in the face of mass panic and extreme volatility as indicated by the VIX.

Was that it?

I hope so, but at the same time there is a lot of economic funk to work through. We've got slowing economies, reduced earnings, ballooned government debt and a whole host of related irregularities.

However, simple economic malaise is not enough to roil the forex markets. They don't have to react in the same way as individual stock markets. If two countries are both going to drop into a recession it would seem that the currencies of those countries would react based on the relative differential between the fundamental shifts in those countries.

I'm not sure if that's clear, but it means that currencies will determine the difference, and change to that -- at least when the markets are rational. It would be great to return to that situation. I'm looking forward to trading in rational markets once again.

They are much easier to trade.

VIX Ahoy 2

Did I mention the VIX was high yesterday?

I meant that it seemed to be getting a bit heated.

Today the VIX is high.

Tomorrow? You tell me.

ECB Liquidity Changes

I noticed something in a news item that I read today that I thought I'd share.

While the big news is focused on the coordinated drop in central bank rates, the ECB did something else. They also eliminated their auction system. No, no, they haven't stopped providing liquidity, they are just doing it a different way than the standard auction process.

What now?

They are making unlimited amounts available at a fixed interest rate of 3.75 percent. Some other additional steps were taken too.

This sounds pretty interesting in the longer term, once the panic lifts.

Does anyone want to delve into figuring out what "unlimited funding" really means?

VIX Ahoy

So, we didn't have any type of bounce off the AUDJPY recovery support trend line. If you were watching the DOW or the NIKKEI you knew what was happening.

At the same time we have a new high water mark in the VIX. Look at that thing. I mean, seriously?

The only thing I can really point to that may be encouraging is that these higher VIX levels don't seem to be equating to lower lows in the currency markets. Well, let me be cautious, not yet anyway.

Strap on your life preserver and wade on in. You might just catch a wave going in your direction... just know when to get off of it!

AUDJPY Technicals

I'm looking at my AUDJPY trend line.

We've seen some good movement, recovering from the recent meltdown in short order... probably due to the coordinated rate changes.

While I like the move I think we're getting to the top of our current trading channel. How we handle the reversal, assuming there is soon to be one, will set the tone of the next couple of days.

If we bounce back up on or before the lower trend line it should mean good things. Next week, of course, may be a different story.

P.S. Can't figure out where the bottom trend line is? Buy a book or something.

Carry Trade Musings

Did you see the carry trades collapse today?

Neither did I.

In fact, things looked downright orderly. Nay, they looked rational. Is this a trick or have all the truly skittish abandon ship at this point?

Be warned, I'm almost always too quick to look past current issues, discounting the ability of the current situation to cause additional convulsions before passing. However, with that said, I'm getting interested in the carry trades.

The AUDJPY, for example, has a lot of retail appeal in Japan. Over time the rate of return during rational market periods is very attractive. There is always a small but consistent upward pressure in this pair.

Both the 1hr and the 3hr charts (Oanda has a 3hr instead of 4hr time frame) could be interpreted as ready for an upward spike. Think I'm nuts? Then get ready for a downward spike.

Just keep in mind that carry trades wind up fairly slowly, most of the time, and unwind with great speed. Your opportunity for quick profit comes with panic and unwinding.

UPDATE: Now, Wednesday morning, we see a recent carry trade meltdown and coordinated rate cuts. Once again I feel compelled to point out that you might just be able to reverse my opinions and be profitable...

Aussie, Aussie, Aussie

Oi, Oi, Oi.

Yeah, okay, it's a big honking rate cut.

Scuttlebutt has it that there might be some coordinated activity in the works, which this RBA rate cut is a sign of.

I'm a bit skeptical of this, but you never know.

However, with their rate now down "all the way" to 6.00 percent, a very high employment rate and a huge public works infrastructure project in the pipeline, funded by recent record exports, I'm still unsure why anybody thinks Australia is a bad bet.

Unless their banking system is about to collapse, like they'd have the only banking system with that particular issue, they seem to be in a much stronger position than most right now.

Europe Gets Crushed

Well, it's been an interesting 24 hours on the Forex markets.

I'd like to say I was on top of everything and made a boatload, but instead I have to admit this has been a lesson style experience. My stops were hammered mercilessly and then the markets dumped me unceremoniously on the pavement. So to speak.

I guess the theme of the day is weakness in Europe. Another theme might be strength in Japan though I think their claim to fame is merely stability by avoidance of stupidity. Think back a few months, when the Euro was hitting new highs daily, and the US was in the doldrums.

So, the big question of the day is really whether or not you expect the Euro to continue tanking in the short term. On the other side, you have to wonder when people will slowly unclench their butt-cheeks and allow themselves to convert their Yen into other assets. Obviously, everybody has been burned, so we can expect caution, volatility, profit-taking and anything else that can make the markets hard to fathom.

Just ask yourself, what's he worst that could happen? No, no, I'm not talking about supreme disaster, but with respect to whatever trade you might be interested in speculating on. Will the Yen rise, drop, go sideways? Will the carry trades buck like a bronco while Europe does a head fake, with intervention promised but not delivered?

I don't really know what to suggest. Wear your seatbelt? Okay, in English, take smaller trades and be sure to use protection, er, stops.

On the flip side, when it's over, you can easily be left on the sidelines. I mean, the world got it's panic on, is there much left? If you've already liquidated your kitchen sink, there really isn't much else to do during the next wave, is there?

Good luck out there!

Seeing Beyond The Bailout

Now that the US bailout package has been passed the question on everyone's mind is what happens next?

Nobody knows. Conversely, everyone knows!

Once the question of government action has been answered we know that the currency markets will move either up or down. Basically, the only time they are in near stasis is when speculators and investors need the next piece of information in order to properly develop their expectations.

Okay, I know, you'd like some ideas to consider so that you can gather ammunition and make up your own mind.

My take is that the GBPJPY and AUDJPY are setting up for a possible double bottom on their 1d charts. The bailout package represents a reason for currency traders to accept a bit more risk. As I'm sure you know carry trade positions are liquidated during periods of risk aversion. Somebody, somewhere, is going to look at the exchange rates and decide that there are some deals.

I'm unsure which currency is more appealing. Both the UK and Australia appear to be in the process of relaxing fears with respect to inflation. When they drop interest rates their currencies won't react by appreciating in price.

However, the GBPJPY is extremely low in historic terms. Perhaps there is some inertia or general distrust of the cable that needs to be worked out, but you have to wonder how much further it can fall. Isn't somebody out there going to start considering goods and services from the UK competitively priced?

With respect to the AUDJPY, I can't imagine that Australia won't be able to sell commodities into Asia. Sure, currency prices may be falling, but the fall in the Australian dollar will leave exporters in a profitable position regardless. With this being the case -- how can Australia consider inflationary pressures to be abating?

Of course, I should note, speculation on macroeconomic fundamentals such as above is not a short term play.

So, what's my strategy?

I plan to accumulate carry trades during upswings. Sure, what upswings you might be wondering. If there aren't any, then I'll continue to wait. However, I expect to see them soon. Once these trades are profitable I'll place in-profit stop losses on them and open up new positions at opportune moments.

Looking at the long term as I am I see thousands of pips on the table. If I can accumulate more and more positions, under the protection of profitable stop losses, I could end up riding some serious profit. Of course, the hard part is not letting all my trades be shaken off when the market is bucking.

Close Your Eyes

Okay, so it doesn't look like anything at all is happening as of yet. Personally, I'm scalping the EURUSD on the 1 min chart this evening.

It seems that nobody is willing to assume that the house will pass the bailout bill this time around. So, once again, we find ourselves in a state of financial stasis. In fact, given the rise that occurred on the original announcement, it may just be that we are priced in already.

If so, that means there is really only a downside, which we'd see on failure.

Who knows?

Cover your assets! ;)

Open Your Eyes

With revived expectations of a bailout package to be voted on this Wednesday evening, it's not hard to spot some double bottoms and double tops on various charts. Okay, maybe not perfect classic formations, but nonetheless, worthy of note.

Obviously, there is no guarantee that the bailout package will be adopted. There is also no guarantee that these formations will complete and activate.

However, it would be foolish to ignore the possibility. Open your eyes, take a look, and find a way to profit from the bills adoption or rejection!

Daily Market Action

Every morning, upon waking, I open up my Forex trading platform and look for any major changes in the world of finance.

This morning, for example, I see that carry trades have had a bounce overnight.

So what, right?

Well, wait a minute here. Bounces represent opportunity. If you look at the 1hr GBPJPY or AUDJPY you'll notice some serious signals. Sure, the CCI, Williams %R and stochastics all moved north in the late evening, but just as importantly the price of these pairs started to show a bottom.

This would have been an excellent place to think about sticking your toe in. I use that phrase to make clear that there is every risk the market will continue to collapse after a false lull. However, those that don't freak out when the talking heads on the tube are mooing up a storm, have the opportunity to pull in some cash.

However, there is a bigger issue that I want to make you aware of. It is very common that the US and Asia will go in one direction while Europe goes in another. It's a natural turnaround point.

Just as Europe may wake up and find a sea change in the markets, so too can we. The end of the day, after Asia has had time to react, before the European markets open, if often a good time to act.

So, to be clear, if you live in Australia or Asia, the close of your markets represents a potential turning point. If you live in the US, you need to stay up until around midnight or so EST to see if the Forex markets will send you some smoke signals about a possible retracement.

Panic In The Streets

Okay, I'm not going to offer any groundbreaking news, we all know what happened to the so-called TARP program.

After the House refused to pass the bill in a bi-partisan manner we saw market participants run for the hills to the tune of a 777 point drop on the DOW. It was quite the day.

Did I forget to mention that the VIX closed at a new high? I even think I saw pieces of the sky fall!

After all of this, I've been watching the carry trades decline precipitously as money was shunted back into Yen as a protective measure.

I don't know about you, but when I see so much hysteria and panic I'm motivated to look for a place to stick my toe into the market. Sure, wait until there are some technical signs to back the decision, but with a tight stop you don't have to put anything significant at risk.

In short, at least with respect to the Forex markets, you control how much risk you are willing to take explicitly. Don't be afraid to look hard at the situation and see if you can find a good risk vs reward ratio. Panic is a sign that it's time to pay attention.

Could the market fall another 700 points? Sure. Could it recover due to some type of new emergency plan? Sure. There's always a winning trade in the Forex markets. Figure out what it is. Find a way to gain entry without much risk. Sit back and see if things change, continue or go sideways.

Shuffle Off To Buffalo

Is it just me or are the Yen based carry trades in stasis?

I might be daydreaming, but it seems to me that the markets are just going to wait around until they find out what happens with the 700 billion bailout program.

Have you looked at the 1 hour AUDJPY or GBPJPY? Unbelievable!

Market Uncertainty

While the government prevaricates on what best to implement in terms of a housing crisis fix, the details of the TARP proposal, financial markets are in a holding pattern.

Nobody wants to simply assume things will go forward as proposed. However, I'm sure nobody wants to stand on the wrong side of a 700 billion tsunami either.

Jim Cramer of Mad Money had an interesting viewpoint on how to deal with the current situation. If the deal falls through the resulting crisis will cause the price of gold to rise. If the deal goes through the resulting inflationary pressure will probably cause the price of gold to rise.

Assuming the TARP program is adopted in a manner similar to that now expected by financial markets, what does that get us? Apparently nobody is sure.

Back To Trading?

During the last few weeks I've been content to play it safe and collect small carry trade positions. However, the markets are starting to act normal, in that they are generally unpredictable but they do seem to adhere to technical indicators a reasonable amount of the time.

It might be time to start trading again.

Prior to the recent market meltdown I was having some success with my trading and had even managed to do some scalping. I've been sharpening up my charts for the last couple of days and am ready to throw myself at the market to see who comes out standing.

Hmm, maybe I should put that another way?

Forex Market Deconstruction

Now that the trading week is over I thought I'd write about a few things that came to mind over the last couple of days.

Current Situation
Everyone is expecting the Fed to come along and put a multi-hundred billion dollar package together with the help of congress. Obviously, this is relieving a lot of the unprecedented pressure on both stocks and various Forex markets. The only fly in the ointment I'd keep an eye on is whether or not things get delayed for any period of time.

The recent explosion in carry trade prices and equity prices is completely dependent on the confidence that has been brought about by a pending solution. Any risk that the solution won't arrive when promised or that it will take longer than promised could lead to some degree of reversal.

The Mighty VIX
Have you heard various pundits talking about the VIX? Basically, it's a measure of volatility. When prices are jumping around quickly the value of the VIX will be quite high. Anyway, people have been referring to a VIX above 30 indicating some type of volatility threshold that might imply we've bottomed. These high volatility periods represent some level of market emotion, such as panic, after which everyone that wanted to sell has sold.

However, we've hit VIX values that should have represented a reversal multiple times. Is the mighty VIX broken? Why did the bounces at those prices represent false rallies?

The answer is simple really. The VIX levels that traditionally have represented a bottom, or an emotional capitulation in the markets, were previous determined during lesser financial stresses. So, various market players assumed the VIX value meant there was a bottom, but they were working on the assumption that bottoms were decided by a static value.

The VIX value needed to call a bottom is variable. It's relative! The size and scope of the problem combined with the sensitivity (or expecations) of those watching the VIX have to be measured together. The expectation of a simple reversal due to a high VIX thwarted it.

So, in the future, when everyone is looking for a 40 or 50 in the VIX, remember that a lesser disaster may be predicted by a lower VIX value. If you sit around waiting for a super high VIX value you might just be left with a pocket full of cash while the market makes it's big reversal.

Did The Carry Trades Bottom?
It would be very easy to sit back, type out y-e-s, and be done with it. Unfortunately, things are much more complex than that. We're certainly going to have some massive relief and subsequent acceptance of risk. However, a bottom will be determined by whether or not other flare ups start to occur. Are any other countries going to end up searching for that last seat when the music stops?

I hope we saw a bottom. I'm playing it like it's a bottom. I'm convinced it will be a local bottom as long as the Fed's plan is adopted.

Other issues are out there though. Will this represent a turning point for the strength of the US dollar? Will it represent a decline in the Japanese Yen? If so, then what might happen to the NZDUSD or GBPUSD? I don't know how the US economy will react, whether or not they'll print money, or whether or not they'll soon start to increase interest rates. However, I do expect the Yen to decline. It's been driven up a lot, and quickly, by people trying to preserve capital. It will go back down when those people start to worry about missing out on an ability to earn.

Expect a bounce downward. Expect it to happen when you think all is well. Expect it to go far enough to shake your resolve. If you do get dumped, expect it to change direction shortly after... ;)

Market Panic To Market Euphoria?

I'm not certain that euphoria is any wiser than panic, but I do know that the Forex world has changed.

The Fed, Congress and the Senate were meeting earlier this evening and are putting together what is touted to be a comprehensive plan to solve the ongoing financial crisis. Basically, by creating an organization to buy and then auction off troubled assets, the fear and uncertainty in the markets will be abated.

Why? Because pricing information will be visible during the auction process and sales to the Fed will happen from organizations that are not in desperate straights. This puts in a floor and establishes a market.

So, what does this mean with respect to Forex markets? If risk aversion is reduced then you can expect the Japanese Yen to be under pressure. What will that do? It will open up the floodgates to the carry traders.

Guess who's been blogging about accumulating carry trade positions during the recent turmoil?

In any case, you do have to watch out for various risks. The markets will overcompensate. They'll reverse. They'll be disappointed because the solution is not as comprehensive as everyone imagined it would be. Who knows?

Congratulations to everyone that has managed to keep some powder dry... but don't get caught napping, the fire sales will be over just about when everyone wakes up and realizes that there is a fire sale -- or sooner! Just don't load up on too much of anything, because somehow the market gremlins are always watching for this situation and they have ways of punishing the unwary.

Long Term Carry Trade Prognosis

With the temporary loan facility made available to AIG by the Fed it seems that the currency markets are getting back a bit more appetite for risk.

The Yen has been dropping and carry trade pairs have floated erratically to more respectable levels. The real question is how the US markets will react tomorrow. I'm expecting the equity markets, the DOW, to do well but I don't know if the carry trades will look appetizing.

If you've been following along you'll know that I put a grid of limit buy orders above the falling prices during the recent crisis. Many of these were struck today shortly after the AIG bailout was announced... allowing me to avoid risk on the way down and letting me catch the upturn without having to be married to my trading platform.

Since I'm feeling smart, which means I'm likely to put in my foot in my mouth at any time, I'll talk about my current thoughts. I am expecting that Asia, most notably China, will be resistant to economic downturn. This will allow countries in the region, again most notably Australia and New Zealand, to grow exports whether or not US and European markets have slowed -- especially since China is very hungry for commodities.

The long term effect of this on Forex markets is that the interest rates in those countries would fall much less than expected or be increased much sooner than expected. Japan, on the other hand, is not known for it's ability to provide commodities. It may find itself more tied to the fates of the US and European markets. If so, and if those areas do drag down the Japanese economy, then the carry trades will be hot properties.

This means that it's time to keep an eye out for long term bottoming activities in the JPY crosses. It might take six days, six months or several years, but keep an eye on economic activity in commodity rich countries. This will give you an early clue as to whether or not this is going to occur. Alternately, keep on eye on the US, because if that economy doesn't implode, everyone running for cover is certainly in the wrong.

Anyhow, since I'm the business of speculating, I guess it doesn't hurt to speculate, does it?

Forex Panic Attack

Well, if it looked like there was some panic last week, it should be very interesting to see what happens during trading this week.

I hope you've kept your powder dry! There should be some Forex fire sales happening before long. The tough part is figuring out when the currency markets are finally starting to turn around again.

Good luck out there...

Forex Carry Trade Bottom?

I'm probably never going to try to call a bottom, but I will point out that there is a difference in behavior since the recent panic drop. Now, we see the Yen based carry pairs bouncing off a resistance point instead of simply dropping as if they are in free-fall.

What am I doing about it?

I'm glad you asked. My current trading activity involves playing with a bit of a gridding strategy. When the price gets down near the recent resistance point I'll place limit buy orders above the price. This means that if the price rises I'll start filling orders. These orders have a small take profit zone so I won't have to worry about accumulating many positions, or risk, but I'll make an okay profit if the price decides to bounce back and forth for a while.

I've booked small amounts of incremental profit this evening in the EURJPY, GBPJPY and AUDJPY markets. Admittedly, the profit is very small per trade. However, if the price continues to rise and fall I'll be able to take that same small slice of profit during each cycle. It adds up!

Interestingly, if the price drops, I'll just extend my grids downward and catch whatever eventual upturn arises.

Don't forget, I like to accumulate long-term carry trade positions at what are apparent low points. I make sure not to overextend my account so that the sum of my open positions are not large enough to put my account at risk. So, if I end up holding on to some grid based trades for the longer term, I am fine with that.

Carry Trade Panic Selling?

Did anyone notice the panic selling out there?

All kinds of carry trades unwound several hundred points in a very short period of time. Speculation in the Forex news rags suggests that losses due to the falling stock exchanges forced people to unwind their carry trades to cover their margins.

In any case, after days of regimented downward movement, the sudden fallout represented a panic moment -- for someone. In the short term, at the very least, this should represent opportunity. I've stuck my toe in.

I certainly don't know if it represents a bottom, but if everyone that wanted out got out, then it won't have much pressure to fall further.

Personally, I'm looking at the Yen based carry trades. Things like the EURJPY, GBPJPY, and the AUDJPY. While the US may eventually recover and raise interest rates, I don't see the Japanese being able to raise interest rates while their currency is appreciating.

How in the world would they compete internationally, exporting products, if they drove their prices up now when everyone else looks to be faltering already?

Have I mentioned lately how important it is to have money on the sidelines so that you can take a poke at raging opportunities? Whether or not you are a fan of his, Jim Cramer also is a proponent of not being fully invested -- which he states is a common joe public trader type of mistake.

Big opportunities offer big profits, but only if the opportunity didn't break you as it was developing.

EURAUD Head And Shoulders?

Are you a Forex carry trader?

Don't look now but the EURAUD has completed two out of three components of a head and shoulders pattern on the hourlies.

You might want to be on the lookout for this over the next several hours. If it activates it could spell a nice downward move for this carry pair.

Carry Trade Accumulation Strategy

As I haven't seen this forex tactic expressed anywhere else I thought I'd blog about it and share it with my small readership.

Are you familiar with trailing stops?

This is when you set a stop loss some number of points below the current price and then allow that stop loss to float when the price moves in a profitable direction.

Well, I'm not going to talk about stop losses, but the idea is similar. What I'm going to describe is a trailing limit order.

Let's say, for example, that you think the GBPJPY is starting to look like a good deal. Instead of jumping on and buying it you may want to set a limit purchase order above the current price. The odds are good, given recent history, that the price will drop further.

Bingo. You can then adjust your limit order and trail the market price by some appropriate level. Be warned that the price could spike, activating your purchase, and then continue dropping. In today's environment you can then save yourself the risk of acquiring a position until the price does show some type of strength.

I'm not aware of any forex trading platform implementing this so you'll have to execute a manual trailing limit order yourself.

Best Forex Trader Return

I see people in various forums asking what the best rate of return is for professional forex traders.

What kind of question is that?

Do you want an annualized answer based on a great trading day? I could boast a fabulous rate of return if I did that, but it wouldn't be meaningful.

How about an annualized rate of return for a trader's best month? No? Maybe some arbitrary consecutive twelve month period? Oh, maybe you wanted a number representing January through December?

Forex trading does not really have a linear behavior that makes it easy to determine what a good rate of return is. Are you a cautious trader? Are you more comfortable taking large risks? Are you trying to accumulate a carry trading position?

Even if you do get someone to tell you what they made over a suitable period of time, you have to realize that past results are not a reliable way to predict the future. Situations change. Economies change on a global scale. Political events that elevate risk levels happen all the time. Just as with stocks, you can never really be sure what will happen.

On a more personal level you are either profitable or you are not. If you are profitable you either have enough of a track record to make a living off it, if you even wanted to, or you don't. If you don't have enough capital to make a living off it, then you can work to build your capital if you are profitable.

Worry about being profitable. Worry about preservation of capital. Don't worry so much about what other people can do or claim to do. This isn't a market that is set up for easy measurement and comparison between participants.

Rest assured, the best rate of return out there is going to be much higher than you or I will be able to earn.

Forex: What Is A Pip?

If you are a beginning forex trader you might be wondering what exactly a pip is. Everyone throws around the lingo but hardly anyone ever stops to give a good explanation that makes things clear for the aspiring trader.

Generally, a pip is explained as the least significant digit of a price quote.

So, if the US Dollar (USD) trades at 120.19 JPY (Japanese Yen) then each unit of change, such as a an increase increase in value of the USD to 120.20 JPY, involves a one pip change in price.

I'm going to step out on a limb and say that a PIP is a price increment point. However, the more confusing official terminology is apparently percentage in point. Which is less confusing?

Either way, it's a single point of change in the quote price between two currencies. Now, while this is very simple, it can be confusing at first when you find out that different currency pairs are quoted to a varying number of digits.

By way of example, here are some relatively current price quotes for various currency pairs:

AUD/JPY   093.29
AUD/USD   0.8574
EUR/USD   1.4668
EUR/JPY   159.62
GBP/JPY   198.05
GBP/USD   1.8204
NZD/USD   0.7001
USD/CAD   1.0635
USD/JPY   108.75

Unfortunately, it is possible that your trading platform will display partial pips! If so, I'd recommend turning that extra level of detail off when you are just getting started. Being clear on currency price and profit/loss calculations will be much more important to you as a beginner than worrying about price moves in the partial pip range.

Why such a feature is enabled by default is something that mystifies me. I guess people in the forex industry soon forget what it is like to be at the beginning of your trading experience -- things can be confusing at first.

Carry Trading Thoughts

Today's post is basically a bit of mental exercise concerning accumulating carry trades. If you are looking for serious advice, this post probably isn't it.

Anyway, for the two or three people that do follow along, you know that I like carry trading. For today's exercise, let's consider the GBPJPY. Looking at the five year chart on Google finance we can see an absolute range of approximately 7000 pips. The GBPJPY price went from somewhere near 180.00 all the way up to 250.00 at it's high.

That's a lot of pips!

Looking closer, we can see that from the highs last summer we have retraced almost 5000 pips.

Now, I know that there is a lot of turmoil in US, UK and world markets, but I don't forsee the GBP being wiped out any time soon. I'd like to accumulate GBP but I don't want to simply buy it on the way down as I have no idea how far down the currency might travel before finally deciding to fight back.

Let's think. How can I take advantage of another future uptrend without risking a lot of capital before it happens? How can I take serious advantage of such a future uptrend if I don't currently have much capital myself? Obviously, I need to find a way to minimize my risk and take advantage of a future trend with house money.

What if I execute some type of sneaky manual gridding strategy. I'm going to design this so that I never have much actual capital at risk while not have to sit on the sidelines if things go my way. Curious? So am I, as I haven't worked through the details yet myself.

Since I trade with Oanda let's consider some very low capital trading. We'll create limit orders above the current market value. These can only be tripped if the market moves up. Given the current bid price of about 198.20 let's consider the following order list...

- buy 10 at 198.30
- buy 10 at 198.35
- buy 10 at 198.40
- buy 10 at 198.45
- buy 10 at 198.50
- buy 10 at 198.55
- buy 10 at 198.60
- buy 10 at 198.65
- buy 10 at 198.70
- buy 10 at 198.75

There, that's ten trades. We'll have a total of 100 units of GBPJPY if the pair moves up to 198.75 at some point. I know this isn't very impressive. I also know that the price is likely to drop too -- it never moves in a straight line. So how do we handle these issues?

First, let's realize that you'd have to have a tiny account to worry about any size of price move while holding onto a mere 100 or 200 units of currency. So, having this level of capital at risk is not a problem. Hey, don't laugh, we aren't done yet!

To keep our risk limited, let's set a stop loss on our lowest priced trades. We'll set it 11 pips above our purchase price and leave only 100 units of currency at risk at any point in time. At 11 pips we'll grab a penny per stop loss tripped potentially see 9 positions left underwater. Keep in mind that over time we could leave multiple sets of 9 positions underwater whenever the price rises for a while prior to the GBPJPY hitting what will become a regional low.

Thinking out loud some more, if we leave 10 underwater sets above us on the way down we'll be sitting on approximately 1000 units. Let's say they average 5000 pips underwater -- which leaves a LOT of room for continued deterioration. We'd be looking at a capital drawdown of less than 500 dollars. At the same time, this is a carry pair, so we would be earning some offsetting interest during this period of being underwater.

Okay, so I am probably looking at a fairly safe idea. I don't expect another 5000 pips of descent, but it's also possible that I can leave more than 1000 units underwater if prices start to whipsaw. I'm comfortable. Now, am I interested? Let's take a look at the behavior on the way up.

Here's an aggregate accumulation of positions during an uptrend...

198.30 - 199.25 ... 200 units
199.30 - 200.25 ... 200 units
200.30 - 201.25 ... 200 units
201.30 - 202.25 ... 200 units
202.30 - 203.25 ... 200 units

Hmm, this doesn't seem to be a large enough accumulation to really sink my teeth into an uptrend. Can I fix it? Maybe. What if we execute trades with larger and larger sizes? Is this somewhat reminiscent of a Martingale strategy?

buy 10 at 198.30
buy 11 at 198.35
buy 12 at 198.40
buy 13 at 198.45
buy 14 at 198.50
buy 15 at 198.55
buy 16 at 198.60
buy 17 at 198.65
buy 18 at 198.70
buy 19 at 198.75
buy 20 at 198.80
buy 22 at 198.85
buy 24 at 198.90
buy 26 at 198.95
buy 28 at 199.00
buy 30 at 199.05
buy 33 at 199.10
buy 36 at 199.15
buy 39 at 199.20
buy 42 at 199.25

Well, this certainly grows a lot faster. We would have 435 units open after about 100 pips of movement. This is going to increase our risk quite a bit. There is always a tradeoff. You simply cannot increase rewards without increasing risks. While I'm not going to do a lengthy detailed analysis of varying rates of growing trade sizes, you can certainly see that our larger riskier trades happen at higher and higher prices. That doesn't feel right.

Another way to look at this is that the probability of making a losing trade increases as the price rises. Eventually the price of the currency pair will hit a regional top and any trades made near that point must be losers. Let's look for a strategy that doesn't require increasing risk with increasing prices. I still want to make a future GBPJPY recovery work for me!

What if I'm willing to add additional funds to my account? I generally have no problem putting about 10% of my net asset value into active carry trades. It would take a tremendous move to cause a margin call if you only use a small amount at any point in time. With a $450 capital infusion I'd be willing to use $45 of margin. Let's see a grid based on getting this money into the market.

- buy 125 at 198.30
- buy 125 at 198.40
- buy 125 at 198.50
- buy 125 at 198.60
- buy 125 at 198.70
- buy 125 at 198.80
- buy 125 at 198.90
- buy 125 at 199.00
- buy 125 at 199.10
- buy 125 at 199.20

Okay, we get 1250 pips out of a 100 point move. If the market doesn't go up then our grid will adjust and move downward. If the grid is activated but then the market immediately drops we have sunk our cash infusion into a reasonable carry trade. Assuming another cash infusion in the following month we can continue to lay out upward grids above the current price.

By putting in fresh capital, and expecting further fresh capital, we can get comfortable pushing our capital into positions at a relatively rapid pace. What happens if the market starts to follow an overall upward trend? Following along from where the grid above left off we get...

- buy 125 at 199.30; place stop loss at 198.40 for our trade at 198.30
- buy 125 at 199.40; place stop loss at 198.50 for our trade at 198.40
- buy 125 at 199.50; place stop loss at 198.60 for our trade at 198.50

Okay, our overall risk isn't increasing. Each time we open a new trade we protect the capital behind the trade which is currently most profitable. We are accumulating more and more open positions without increasing trade size.

However, there is every possibility that it may takes months of capital infusions and a fairly sizable carry trade position before the market turns around to any degree. What if it takes years before the GBPJPY makes any attempt at serious recovery?

Anyway, as I said at the beginning, this is just a mental exercise. I don't think that very many people trade with a carry accumulation mindset. I suspect that many traders are looking at the swings in price and trying to get in on them... as they are huge in magnitude compared to shaving some interest from the market over larger time periods.

I've had some luck trading price movements myself... but I like the lure of building up some type of income stream over time.

Part Time Currency Trader

As I've written before it is quite easy to become a currency trader. The harder part is being a currency trader that doesn't lose money. You see, according to the scuttlebutt on the forums, about 90% of new traders end up losing their money to the market.

Are you thinking about trying your hand?

I'm not here to talk you out of it. I myself am a part time currency trader. By day I work at my office job and by night I fight crime with a mask and cape. Wait, no, that's not right. By night I trade online when family duties allow me to squander a chunk of time.

Trading part time has it's challenges. You will see endless market movements that you did not participate in. You will miss opportunities to open or close a position even though your ideas about what would happen next were proven right. In fact, a very large part of trading well involves being able to deal with the psychological aspects of trading, whether part time or not.

If you read other posts in my blog, such as this one on trading philosophy, you'll see that I recommend working with very small trades. If you take larger trades, relative to your available capital, you'll find the emotional stress greatly magnified. It is very difficult to make good decisions as you watch your capital evaporate before your eyes.

Nothing will drive you from the market quicker than watching your capital shrink, panicking and saving what little you can, and then watching the market reverse leaving you without a stake. Or, perhaps worse, you do get back in after seeing a healthy rise, only to watch the market reverse yet again and wreak havoc on your capital once again.

It happens. I'm sure it happens a lot.

Did I mention that I'm not trying to talk you out of becoming a currency trader? It certainly isn't impossible to trade successfully but you really have to understand that there are many different ways to be unsuccessful. One very easy way to fail is to enter the market during a period in which it is easy to understand market behavior, think that trading is quite easy, and then have the market turn upside down and brutally fleece you.

Let's see. Yes, another painful lesson is developing the discipline to set stops and then have them tripped trivially, while the market does in fact go in the direction that you expected. Of course, this sets you up for the opposite, hanging on to a trade endlessly expecting to go as you expected, while it sucks up more and more capital.

My advice, do become a currency trader. Take your time. Learn with a practice account. Eventually, switch to a micro or nano account and trade with very small amounts of money. Continue to play with very small capitalizations until you have blown up your account once or twice -- this happens when you get a margin call and all your funds (except active margin) are forfeited.

Take the long view. There is always going to be another opportunity. No currency pair moves only up or only down. When trading part time you must either make accurate predictions or tread softly enough that the market can't move far enough to cause a margin call.

Anyway, to get into some information you can act on, if you are totally new to the game you'll want to know the following:

• Most, if not all, companies that offer online foreign exchange trading provide free forex demo accounts. These practice accounts are the same as live accounts except of course that you don't trade real money.


• A currency trading platform is simply a fancy name for what is usually branded currency trading software. This software will let you view charts for various currency pairs, add indicators and execute trades


• Forex trading is global. You can trade starting on Monday moring in Asia until Friday night in New York. Trading is 24 hours a day during this period though each trading session will offer differing market volume and behavior.


• If you are looking for a place to open your first forex demo account I'd suggest Oanda. To ensure that you don't think I'm compensated to say that I'll ask you to search Google to find them. They are a reputable company that allows you to trade with very small amounts -- which is great for starting out.

Good luck my friend, I wish you every success.

Forex Turmoil: Still On The Sidelines

During the last few weeks of topsy-turvy price movements I've been playing it safe. I like to buy carry trade pairs, but they've been heading down a lot.

Now, the big question, when will things start to turn around? A few of the pairs are getting into historically low valuations. For example, take a look at the GBPJPY pair on google finance -- click the 5yr option when it loads.

Sure, we could set new lows, perhaps for a months or years, but the odds of the UK having lower interests rates than Japan seems rather extreme. At some point, when things do finally settle down in another year or more, the GBPJPY will start to get attractive.

Other pairs, such as GBPUSD or EURUSD, which represent a bet against the US dollar make me nervous. While there is a possibility that some parts of the world, notably Australia, New Zealand and Asia, can avoid a recessionary period it's also very possible that the sinking US dollar will create a large enough trade advantage to shift the slowdown from the US to other countries as their own companies find it harder to compete internationally.

Anyway, I don't know how it will play out and from what I've learned buying a currency without having a clear notion of what you expect to happen is akin to gambling. Sure, you can be wrong when you believe something, but at least then you aren't throwing your money at the toss of the dice... and often it is possible to figure out what is going on to some degree.

So, for now, I'm keeping an eye on the JPY crosses. Perhaps the AUDJPY, EURJPY, GBPJPY and CADJPY will find themselves showing up in my account?

Forex Market Turmoil

My recent excellent trading week was followed by a less than stellar week. Basically, I was caught by surprise when the US markets, and hence the US dollar, started to make a comeback.

I've been cutting my teeth in the forex market for over a year now, but this entire period has been associated with a weakening US dollar. The market mechanics seem to be changing around -- so I'm finding it more difficult to trade. Currencies aren't bouncing off their bollinger boundaries anymore and instead are trading flat for extended periods of time.

There's no good indication of future expections coming out of a flat line. Plenty of indicators, such as stochastics, become worthless when they are operating on moves of only a few pips. They are no longer able to predict entry points that are very likely to coincide with meaningful price moves.

In light of all this, I've swapped much of my capital into my low risk carry trading account.

I'm learning, slowly, that it's all about preservation of capital. In uncertain times hunker down and protect what you have. When things start to operate according to your plan you can then bring out the big guns and start working within those more favorable conditions.

Don't try to force the market to give you money. If it's acting counter to what you are used to then it's time to regroup and figure out what is going on. For example, if the US markets start to show signs of an underlying economic recovery, we'll be able to expect US interest rates to rise. We could be in for several years of US dollar recovery while the Eurozone, which hasn't swallowed as much medicine, may still have to work out some issues.

Obviously, I'm not certain on the timing, but when the market participants who exited the dollar return to it, you don't want to be on the wrong side of that trade.

Friday Forex Recap

This has by far been my best trading week...

I might have made more in the past but it was admittedly just hit and miss combined with patience. This last week I've been following technical indicators and doing more than just hope for the best at Bollinger boundaries.

Sunday PM through Monday PM -- NAV +3.05%
Tuesday AM through Tuesday PM -- NAV +2.93%
Wednesday AM through Wednesday PM -- NAV +8.2%
Thursday AM through Thursday PM -- NAV +3.9%
Friday AM through Friday PM -- NAV +1.1%

During the business day I've been able to take positions for hours at a time and generally end up ahead. In the evenings the market seems to slow down, but I am now generally able to scalp out dollars using the 1m and 5m in concert.

Additionally, when I am behind in a day trade or a scalping position I am often able to spot a good reversal point and take advantage of that with a second position. Doing this a few times can earn back the losses on the original trade -- assuming it still appears to be a good idea to hold onto it.

Some things I've realized this week:

• I now understand what people mean when they talk about not trading on Sunday or Friday. Now that I can begin to get a feel for the market I noticed that movement and opportunity were lacklustre during these periods.
  
  
• I can scalp! This is awesome. It's powerful to be able to scratch pips out of the markets whether they are rising or falling. It's nice to know I can do this if I have a position I want to hold but that is making me nervous as it accumulates a loss before the expected move.
  
  
• I don't know if these results will now be typical for me or not, but I do finally understand that it isn't impossible to work the markets and earn money.
  
  
• As well, I understand that I don't want to be trading around news events. If I'm carefully looking for technical setups, the last thing I want is some huge sudden movement due to news. Not only will this potentially catch me on the wrong side of a trade, but it may throw off my ability to analyze things for a while

I should note that my net asset value increases are not compounded. I do skim off most of the gains and push them into a much less risky sub-account. I have no idea whether or not I can trade with the same style when the numbers get bigger. The psychology of seeing larger losses mounting, or higher gains accrue, may throw off my style and keep me from making any money.

Thursday's Forex Results: NAV +3.9%

Believe it or not I'm not enthused about today's earnings.

They just didn't seem to be coming naturally. I don't know how to explain it. The markets have been ranging for the last couple of days so maybe that is what's wrong. I actually closed all open trades a few times today -- just so that I could get out of the market and not be exposed to any risk.

Maybe I'm just tired?

Anyway, I expect tomorrow to be less than stellar as well. The markets seem to get jittery on Friday... with many players trying to get out of the market prior to the non-trading weekend. However, with the recent ranging, maybe the market will make some sudden moves or something.

Wednesday Forex Gains: NAV +8.2%

Like the title said, today was a great day!

A short morning session yielded two or three percent. The rest of the day went very slowly, but I was able to wrestle pips out of the market again and again.

Basically, I'm watching charts very closely, looking for setups. I've got some work to do to improve my timing, but in general I seem to have a good collection of indicators that keep me from getting into trouble very often.

When a setup happens, I drop in a position. Generally, I'll switch from currency to currency, on the 1h, looking for things I am fairly confident will move in a way I can predict. Once I have those, I may check the 5m, looking for the same indications, as a means of entry timing.

What seems to happen is that sometimes I'll be right, and sometimes I'll be wrong. The positions that go well end up hitting take profits. At that point, because they are reasonably well chosen, the market will often reverse and give me an opportunity to exit from the positions that weren't previously winners.

Anyway, the real key, at least for me, is having a series of indicators that give you a very high probability of being able to make a prediction. Unfortunately, I'm not willing to get very precise and tell you my setup. Though people often say that it makes no difference how many people know something, it does. If everyone knows the same thing -- then some people will anticipate that thing and in doing so change the price dynamics.

Day Trading and Scalping

Things are still going very well, but I have to admit I haven't been able to pick off huge gains this week. Not yet anyway.

Here's the scoop...

Sunday PM through Monday PM -- NAV +3.05%
Tuesday AM though Tuesday PM -- NAV +2.93%

This is okay, but I see large profits left on the table. It's strange, in order to make it easier to pick up pips I'm working on the 1M and 5M charts. This is pretty good for watching movement -- feeling the rhythm of market -- but it sucks for keeping in mind the larger picture. I can certainly see why people invest in trading stations with multiple large monitors.

Anyhow, to be clear, while the net asset value can be determined via unrealized profits and losses, I am closing all open trades at the end of each session. These are true, risk free at the time of reporting, NAV numbers.

I can't help but wonder if it would be easier to scalp and/or trade profitably if I was able to focus on this during business hours. Well, it would probably be easier to catch movement during the European session too. Things seem to get pretty quiet at times during the Asian session.

Finally, since I have a very high win percentage on scalp trades I am thinking of increasing the size of these trades. Would the psychology of risk start getting in the way if I did that? Probably. If not, it wouldn't be very hard to turn up the income quite a bit -- and I always assume that if things were that easy everyone would do it.

We'll see.

Trading Week Recap

It's been a great week.

I've been able to apply a new strategy dealing with negatively correlated pairs and I've also been able to put together a couple of reasonably successful days by working to curb my greed and waiting for appropriate entry times based on my signals.

How successful were these last couple of days?

Yesterday I increased the NAV on my high risk account by ~5.6 percent. Today I blasted out a very nice ~7.3 percent. Holy crap! This makes two days in a row that I've taken a good portion of my earnings and transferred them into a long term low-risk carry trading account.

You may be wondering why I do that. Well, it's very likely, perhaps probable, that I'll eventually blow up my high risk account. So, when it's profitable, I move my earnings to a safe place so I can continue to risk an amount I'm comfortable with. Obviously, I want to earn and protect more than the entire NAV of my account before eventually blowing it up. Then it will be time to learn from my mistakes, re-fund the account, and try again.

So, the method to my madness is that it's a lot more fun, or exciting, to participate in high risk big return speculation. As I get better at this I am able to generate a net overall positive return -- which I then put to work in long term carry positions at very low risk. This means I get to have fun every day, mixed with some hair loss on tough days, as well as building a slowly increasing carry trade income.

In the long term, this might work out well.

Overcoming Greed

No, I'm not here to tell you that I've overcome greed.

However, I can tell you how damaging it is to let greed get involved in your decision making process. Generally, it works like this:

• You see a pair moving in a direction, let's say up, and you want aboard before the big move.


• You grab a piece of this pair right then, so you won't be left behind.


• You look at your charts and see that you've bought at the top of a bollinger band in one timeframe or another.


• You spend untold hours having the price come close to your original purchase price but of course it never gets above your purchase price to any degree.


• After biting your nails for hours you finally dump the pair as soon as you can get a few measly pips out of it.

Sound familiar? Here's me being an idiot...


The really annoying thing that occurs to you, again and again, in the above scenario, is that if you had waited until the price fell a dozen pips or more you'd have been able to make five or six reasonably profitable trades instead of sitting on a turkey.

While bollinger bands are not a panacea they can be a great tool. If you buy close to a short-term low on your chart you are much more likely to be able to sit on your trade and wait for a good move. This is because your trade may never sink far enough under water to cause you stress.

Yes, yes, I know. We should always have stops on when we make our purchases. However, that doesn't mean that we won't want to babysit our trades so that we can be there to grab another trade if the opportunity strikes.

Once again, an opportunity for you to learn from my mistakes...

Forex Fun and Profit with Correlations

What is the first thing that comes to mind when you think of Forex trading? I'm willing to bet that it isn't fun.

Well, recently I've been enjoying trading a little more than usual.

While doing a bit of reading I found a link talking about currency correlations. Go take a look at the charts provided (scroll down a bit). Notice anything? Generally, when a currency pair you are holding rises or falls, there is another currency pair that is moving in a different direction.

I know, this shouldn't be a revelation to anyone, should it?

However, if you open positions in two currencies that have a high negative correlation you will often see one of them being profitable in the near term. Then, if you are careful, you can pick good moments to close and reopen your offsetting positions. Furthermore, if you generally participate in carry trades, as I do, you'll have an ability to enter more positions with less variability in your drawdown.

Of course, don't get me wrong, this does entail a higher level of risk. At the very least you must be aware that a correlation present now may suddenly disappear or reverse at any time. Alternately, once you open or close a trade at what appears to be an opportune moment, the market may move unexpectedly while you don't have an offsetting currency pair. This is nothing new, but if you are trading a higher percentage of your NAV you will be exposed to higher risks.

Personally, I use an account with a small relative balance for this type of trading. When I am making profits I siphon much of them out into an account that is not exposed to such a high level of risk. As a bonus, highs and lows demonstrated in the correlations account indicate good entry points in my less risky accounts.

So, where's the fun? The fun is in seeing profitable positions a majority of the time. It's in having just about any move, and it's reversal, present an opportunity to you in one currency or another. The long periods of waiting and boredom are reduced. All you have to do is be willing to accept some risk on an account set up for this purpose.

Addendum: In the last 12 hours the NAV on my high risk account increased by 5.66%! Now that's fun. I've closed all open trades as it's time to start the work day...

Weekend Forex Intermission

Though my wife is happy that there isn't any Forex trading during the weekends I certainly wish there was. I enjoy trading but generally don't have that much opportunity to do so during the work week... and I'm anything but a full time professional.

So, the past week was fairly successful. Thanks to the recovery in the AUD carry trades I managed to catch a nice downturn in the EURAUD. I did have to withstand some nail biting as it went against my prediction for a few days before eventually succumbing to my will. Alternately, maybe I was just lucky to catch some news going my way. Either way, I'll take it.

Now that the summer vacations and visits are mostly over, already, it will be time to start putting little bits of capital into the market on a regular basis. It seems to make it much easier to earn if you always have a bit more capital to play with.

Keeping an Eye on the EURTRY

I liquidated some profitable short positions in the EURTRY around the 1.9150 price level.

While this wasn't the absolute bottom it was well below the current levels -- due to a recent price spike. As the spreads are reasonable during the morning hours I will consider selling a small chunk tomorrow morning if it looks like things are going to turn around.

However, the EURTRY is not the place for absolute beginners to dip their toe. Not only is it volatile, but the widely swinging spreads play havoc with trying to use stops appropriately.

Thoughts on AUDNZD and NZDUSD

Both of these currency pairs have moved a long away against carry positions.

It might be time to consider shorting some AUDNZD and going long some NZDUSD. Take a look at the dailies [daily charts] and see if you think some type of reversal is in the works.

As always, remember I'm a carry trader, so I'd buy a small position that I'd be happy to hold for the long term in the event that I was mistaken.

Consider GBPCHF

It's starting to look like time to consider taking a small bite of GBPCHF. However, you may want to wait for a bit of strength before taking the leap...

Learning To Love Stochastics

Many of you trading in the Forex markets know that the difference between success and failure lies in the probabilities.

What is the probability that your speculation will be correct?

The more often that your positions are correct the more profitable you will be. This is part of the reason that so many bozos are busy promoting supposedly infallible commercial signals. Seriously, if their signals were infallible, why wouldn't they get rich trading on them instead of selling them to you for peanuts?

Something I've noticed recently is that stochastic indicators show a good correlation with spikes in price. Of course, this does not imply a one to one correlation, but if you are betting with the stochastic indicators you will simply find yourself on the correct side of a nice price move from time to time.

As I've said before, I'm also a fan of Bollinger bands... and they can certainly be used together.

Here's a simple strategy you can try. Pick a carry trade, such as AUDJPY, and consider buying it when the price touches the bottom Bollinger band. At the same time, ensure that the stochastic indicator is either at the bottom or just starting to come back towards the top.

The idea is to open a small position that you can afford to hold and carry, but to accept a profit if your position proves to be profitable. Remember, prices don't go in one direction forever, so don't be afraid to cash out your position -- without beating yourself up if you don't catch the top. It's about consistently making profitable trades not being the best at calling tops and bottoms!

Trading The EUR/AUD

I've spent the better part of a year focusing my attention on the AUD/JPY. I think it's time to start looking into other pairs...

Last week I started trading (shorting) the EURAUD.

The EURAUD is another pair suitable for the carry trade. [For you beginners, some currency pairs earn interest while you hold them. Those that do allow you to participate in the so-called carry trade. See my recent forex roadmap post for a nice list.] However, I've been trading it instead of trying to hold onto it... and so far it's been good to me.

The question is, what will next week bring?

I haven't focused on active day trading before. I've got a chunk of carry trade holdings across a variety of currencies, but that is a completely different game. Basically, as long as you don't overtrade [buy too much and hence expose yourself to excessive risk] it's very slow paced. When you have some extra capital in your account look for an opportunistic pricing situation and grab a small slice of a pair you are willing to hang on to.

Active trading is a lot faster paced. I'm finding that if I want to spend a lot of time on the market I need to be have the lure of gains. Yes, that means risk! So, I've created a sub-account where I put a few dollars at extreme risk. Assuming I can make some wins I'll shuttle those wins to a safer sub-account.

So, I'm no longer executing a purely boring long-term carry strategy. Seriously, it's very boring to put a few bucks into your account from time to time and then make a purchase once in a blue moon when your capital reserve makes it safe to do so. I want to do this, but I also need to drive the Ferrari once in a while, y'know?

Yep, shorting the EURAUD is my currency trading Ferrari. It seems to sidestep the volatility of the AUDJPY somewhat by avoiding the EURUSD and USDJPY influences. It handles well since the EUR is such a huge and active market and acquires some nimble moves from the AUD.