Theory: Trading With Little To No Margin

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

Take a mental walk with me...

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

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

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

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

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

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

AUDJPY: Risk Aversion

It's likely, with the bad jobs and housing starts news this morning, that risk aversion will come into play.

Basically, the AUDJPY is a good indicator of fear in the markets these days.

With all that said, I'm still going to watch closely for a bounce of the potential support line. That is likely to be the point that the market decides to rally or collapse for the day.

... continuing ...

I don't see that the market was pricing in a recovery already. There are starting to be some signs that things aren't in a free-fall. The fact that jobs and housing starts aren't good should be a surprise to nobody.

Anyway, what I'm suggesting is that the news may look bad to those that started to buy into a recent rash of good news, but realistically, anyone who knows anything about markets should be waiting on the sidelines to swoop in.

Oops, you can see my upward bias showing again can't you?

Crushed By The AUD/JPY Rollover?

How did you do during the recent AUDJPY (AUD/USD to USD/JPY) freefall?

If you were paying attention you noticed the double top happen not too long ago -- the one I blogged about recently. That was your warning that the market was facing a potential reversal.

The market fell pretty fast. I hope you weren't sitting on any large unprotected positions.

While I don't have the patience to stay completely out of the market until large drops have happened, I can certainly add additional capital to my account to take advantage of the drop and treat it like the opportunity it is. However, I do have to wonder if this is going to end up being a retest of the DOW lows since the most recent bottom.

So, I now have three things to consider:

1. Is the market going to recover quickly, such that I want to be in it?
2. If I jump in the market now, is it going to sink and retest lows due to a DOW decline?
3. If the market does continue to decline, will it do so over a long enough period for me to be ready to inject some more capital at that point too?

Honestly though, I'll probably just execute a plan the emulates dollar cost averaging and not worry about it. I really enjoy being involved in the market without having to seriously worry about it.

Double Top Warning

It isn't here yet, and that means it may never arrive, but we are currently looking at a potential double top on the AUDJPY.

This means that the DOW could also be poised to give up some recent gains.

Obviously, the DOW can do what it wants, but if you are seeing gains right now and are thinking of jumping in, be wary.


Personally, I'm hoping for the downturn. If it happens according to "my" chart then it means that I'm able to take advantage of the movement. It also means that the AUDJPY will be "on sale" as it will eventually rise again. It will always rise again as long as the carry trade remains associated with the DOW.

UPDATE:

The rollover continues...


While anything can happen, ignore such signs at your own risk!

UPDATE:

I hope you were paying attention this morning...


The market has now made a double top and reacted to it. The DOW has followed/driven the AUDJPY (since I'm sure the overseas markets have a say in the matter too) and once again I have a strange feeling of "control" which is certainly misplaced.

Is It Bigger Than A Breadbox?

This was gold!

Poulson, while trying to avoid questions about the exact size of a proposed stimulus package, answered "I don't want to play 'is it bigger than a breadbox?'"

It's hard to say what the DOW (and hence the AUDJPY) is going to do with this. Obviously, it's better for the economy than not having incentives, so it must have some impact. It also shows the government is serious about the issue -- whether or not it will have the desired impact.

I'm currently watching a bit of a bounce in the AUDJPY. Perhaps people are buying companies that are going to benefit from the impending temporary increase in consumer spending?

However, when the president was speaking we saw a decline...

Turbulent Tuesday - AUDJPY Opportunities

I was on the road today, so I didn't have to witness the inevitable slide in the AUDJPY as the DOW searched for it's navel.

However, I was back in my technology haven in time to notice the AUDJPY bouncing off the 93.80 resistance point.

I don't know if we'll be on our way further down, but we are getting to historically depressed levels. Now, what to do. I'm putting in a little bit here, with the idea to put in more once I get this stake behind a stop loss. I'm hoping for an overnight bounce due to overseas trading - even though tomorrow might be another dizzying day on the DOW.

In general, whether or not you want to follow suit, I'm going to start considering the AUDJPY cheap, but at the same time realize it could drop like a stone. I'll take little pieces at resistance points, perhaps in the evenings after the DOW has wreaked it's havoc.

I really want to end up with some buried positions, here in the low 90's or further down, when the AUDJPY is back in the high 90's or 100's some time in the future. What could be better than having a large profitable carry position protected by 1000 pips or more once the recessionary downside is behind us?

UPDATE:

After an initial bounce, to about 94.55 the AUDJPY has dropped down to a lower resistance level. Remember, if you want to get in, get in with sizes you can hold indefinitely, as there is no assurance of anything approaching a bottom.

Once a bottom does eventually occur, even if false, you'll be able to set stop losses and safely get stopped out during any downturn. In the mean time, if you jump in with too much, too often, you'll eventually end up with a busted account!