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.