Wednesday, December 31, 2008

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.

Monday, December 29, 2008

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.

Friday, December 26, 2008

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.

Wednesday, December 24, 2008

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.

Tuesday, December 23, 2008

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.


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.

Monday, December 22, 2008

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?

Friday, December 19, 2008

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.

Thursday, December 18, 2008

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.

Wednesday, December 17, 2008

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.

Monday, December 8, 2008

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...

Friday, December 5, 2008

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.