Longer Term Charts

Recently, Oanda has added a weekly period to their proprietary trading platform. As you can imagine this thing is not very exciting to watch on an active basis. However, I think there is predictive value available here.

For example, though it is difficult to catch a top or a bottom at this level of observation you can certainly see longer term bollinger events. Here is what looks like a bounce on the CADCHF.

A retest of recent highs near 0.9950, if that happens, will put 500 pips on the table. Is it worth waiting a month or more to earn some of that? Alternately, if you expect it is going to get back near those highs do you think there will be some excellent buying chances over the next month as price works its way there?

You bet!

The longer term play might involve a smaller position. You'd have to be willing to take the chance that news events will change the course of action and possibly be willing to endure hundred pip losses for weeks.

The shorter term plays, perhaps on the 1 day, 4 hour or 1 hour might be a bit more lucrative. If you are fairly certain you know what direction the price will be moving and the charts provide a nice entry setup then you may choose to put a bigger position into play for a relatively short period of time.

Just be careful. Long term charts can move a long way in the wrong direction even if you are ultimately proven right. You'll need discipline to hold on and to let go at the appropriate times.

Buy AUDJPY On Dips?

It's very plausible that the RBA (Reserve Bank of Australia) has started the slow process of moving interest rates from emergency levels to normal.

RBA Starts Rate Rises

We'll want to see what happens over the next couple of months in order to confirm this analysis. However, from now on whenever the markets are panicked about the latest downward surprise, it might be time to dip your toes in.

We're staring at the bottom of a long term AUDJPY carry trade cycle.

I know that Japan has made some noise about not wanting a weak dollar -- but you have to look at the size of their debt load before you start to worry about them being willing or able to withstand high interest rates.

The recently touted alternate carry trade, consisting of the AUDUSD, is much more precarious in my opinion. It's great in the short term. However, in the longer term, perhaps a year or more, I think you'll find the greenback starts to get supported by higher interest rates. How else will the USA entice foreign entities to continue to buy and hold debt once the worldwide spate of risk aversion fades?

Personally, I think this is a good time to raise capital and slowly work on getting carry trades protected by an in-profit stop loss. Presumably, over the course of months and years, we should find that 80.00 represents resistance, then perhaps 85.00, 90.00, 95.00 or more. We'll probably have Yen intervention from time to time as well and language designed to scare us out... but if you keep an eye on the fundamentals you can probably view these as opportunities to place more capital into stop loss protected profitable trades.

Also, if I was managing a countries financial reserves I think I'd be looking for currency trading opportunities involving countries that are both economically sound and likely to continue to raise interest rates over the years as inflation gathers steam. The general business cycle is probably not going to disappear this time around either... regardless of all the hyperbole in the mainstream media.

Robot Strategy / Development

Without getting into detailed specifics I thought I'd try to answer a recent question about the strategies I'm trying with my various robots.

First, a bit of background in case this is the first post you see on this blog:

• I design software and systems for a living
• I've been trading for years -- learning through the heart of the downturn.

With that out of the way I'd suggest looking at one of my posts about microtrading.

You may also want to consider the fact that the Australian economy seems to be doing very well with respect to the rest of the world. I've been pointing that out on my blog from time to time. Also, if you follow AUDJPY as I do, you may notice that the RBA just hiked interest rates by 25 basis points. This bears out a previous post about the long term carry trade prognosis dated September 2008.

Anyway, what this all means is that I'm happy to open long positions in AUDJPY, to some pre-defined level of risk, and then wait for this currency pair to give me some profits. To get down to brass tacks, the AUDJPY trading robot looks for what appears to be decent entry points, perhaps via stochastics and/or moving average crossovers, and then opens up micro-positions.

Sure, often the robot is wrong for some period of time. Who cares? With confidence that the AUDJPY will eventually rebound, and/or pay decent carry trade rates, it doesn't hurt to wait. Besides, when the robot is wrong, trades entered at even lower levels can often be closed for a profit, repeatedly, prior to a later price rise allowing the short-term carry trade to be closed for a profit.

In case you are thinking this sounds like throwing darts here are a few of the strategic points that guide this strategy:

• The fundamentals over the next period of years points to a rising AUDJPY.
• A future period of panic is unlikely to exceed the unwind that occurred during the recent financial crisis.
• A rising AUDJPY will eventually allow any position to be exited profitably during a new high.
• Using microtrades allows frequent trading within precise levels of accumulated risk.
• Adding logic to enter positions at what will often be an opportune time greatly improves the odds of taking profit from a position quickly.

Another robot, currently experimental, trades the EURCHF. The idea here is that this currency pair is relatively stable compared to some others. Here I'm basically trying to play a mathematical game. If one were to open a very small long or short position every few moments the price would eventually make at least one trade direction profitable.

The reason this is interesting is that you can define the rate of return you want. Trade N positions at size S per hour at P pips profit and you will earn $D. Of course, it isn't so simple, but that's where the challenge lies. How do you keep from accumulating all your long positions at a recent top and all your short positions at a recent bottom? How do you keep from accumulating positions during a lull in price movement? How can you goose profits during active periods to make up for price movement lulls?

This thing is a work in progress, is not significantly capitalized, and probably is a pure dart throwing exercise. However, it does keep me busy. This is important. If I don't keep busy I'll worry too much about what's happening in my AUDJPY sub-account and either make discretionary trades or tinker with something that is already working well enough.

Anyway, all strategies face the same basic issues. These include:

• Prices will eventually move up and down in varying amounts.
• Accumulation of positions incurs increasing levels of risk.
• Avoidance of risk decreases maximum theoretical gains.
• Carry trades have long term pressure supporting the carry trade.
• Carry trade pairs have periodic unwinds.
• Long term economic fundamentals are plainly visible to all but very often misunderstood.

Traditional robot development is based on the same concepts as discretionary trading. Find a high probability entry point, based on risk versus reward, set an appropriate stop-loss, and then wait to see the result.

In a nutshell -- my current robot strategy is to look for long term predictability and then try to take advantage of that predictability as often as possible using small individual units of risk.

A final word of advice. If I'm wrong about the AUDJPY, and it doesn't have a long term rising trajectory, then I'll have an unproductive robot sitting on some carry trades. Similarly, if you decide to take advantage of a longer term trend, make sure you have a solid basis for your predictions.

Friday Market Analysis

I am following CNBC regularly (via their web site) these days. I see many of the pundits advocating panic and doom. I suspect they all want to be able to claim they were right when we finally do experience some type of pullback.

However, these braying naysayers of doom really don't have much of import to say. All they really do is act as large forces on the emotions of market players. Everyone is appropriately skittish due to the massive bear movements over the last year or more. It's only natural.

All of these fools who only imagine one direction for the markets will be right from time to time. What they say is not important. What's important is to understand the volatility, or level of price fluctuation, and the amount of risk that this implies when you are trading.

For example, the odd negative number here and there doesn't mean all that much. This doesn't mean the market won't throw a tantrum, but it does mean that there could be a spate of good numbers in another week or two. These trends have variations in them as well. Perhaps because the media jumps on whichever bandwagon has the most passengers the market sentiment gets rapidly overblown.

So, sure, we could see some type of sell-off coming soon. So what? So, don't risk all your money on the notion that the markets, carry trades, risk appetite, GDP growth, corporate profits or whatever will only go up. In fact, cushion yourself by assuming a mini-panic could be right around the corner. Seriously, hasn't everyone been hiding under their sheets due solely to the fact that we're in September?

What am I going to do? I'm going to move more capital into my account. Any serious downtown represents a good opportunity to scale in. So, let it rain, I'm going to wait until all the overextended or panicked fools get forced out, then I'm going to take a peck at an opportunity here and there. Again, just make sure to nibble your way in at appropriate times.

Remember, fear and downward movement provides opportunity, but only if you don't assume you can predict the bottom and thus assume too much risk. When you aren't being pushed into making decisions by market movements you can make much better decisions.

So, early next week, fresh capital into my account. I can apportion this to my robot trading army (I know, but it sounds more fun this way) in small chunks as we come up to significant resistance levels. Unless the world collapses, and if it does my trading account will be the least of my worries, there will eventually be another upturn.

As a side note, I'm planning to make opposing robots this weekend. They will trade long and short positions in different sub-accounts. I expect that one of the two will be earning during up or down movements. I expect both of them will earn during periods that the market is moving sideways. You can't see it but I'm rubbing my hands together in a greedy manner -- think Mr Burns.

Good luck out there.

Twitter Forex Tweet Strategy

Have you been following people involved in fx trading on twitter?

Have you noticed how many people are happy to tell you what happened? While macroeconomic news and previous day post analysis can be useful, it certainly doesn't help you make a trading decision based on current charts.

I have a little proposal to make.

Instead of tweeting that you've opened a long or short position provide some information that other people can use to apply their own strategies. Frankly, I don't care what crappy decisions others are making. I care what the charts are saying. I'll do my own technical analysis and decide on my own trades.

So, tell me that a pattern is forming on a named pair's chart in a certain timeframe. For example, right now the AUDJPY is retesting May highs of 76.00 and obviously this is true on any chart -- though you may need a longer chart to actually see it.

Then, I can whip open my chart, draw some lines, figure out a strategy, and trade on the opportunity.

To summarize, we need to tweet about opportunities that are shaping up. We need to just drop each other a note that something is happening. Anybody who has traded for any length of time can figure out what to do -- but unless we have the luxury of trading full time we just can't spot all the opportunities.

In short. Smarten up and stop trying to show the world how damned smart you are. We don't care!

How about we call this the Useful Forex Tweet Agreement (UFTA).

UPDATE: I've tweeted the AUDJPY information (again) using the #ufta tag...

Forex Tips - Microtrading

The AUDJPY currency pair is currently trading around the 76.00 mark.

Over the last twenty days, from May 7 through May 27, I've been experimenting with a concept I've been calling microtrading.

I don't intend to close all of my positions at the moment, but if I did my account NAV would increase by more than 10% over that period.

While I realize that active trading can return spectacular results compared to a paltry 10% it does require a lot more effort and time. Personally, my full time job and other issues have my complete attention. I don't have the luxury of time or the mindset to take larger risks at the moment.

Anyway, open up your trading platform and I'll walk you through the process of trading this strategy.

1) On May 10 we topped out around 76.00 on the AUDJPY pair.

2) Based on my account size I could safely open long positions for every fall of 20 pips. This isn't the goal but it is the maximum density of trades I'd allow.

3) As the price of this currency pair dropped to around 70.50 on May 15 I would accumulate positions based on the previous point. Basically, when you see what looks like a support point or if the price moved down a lot while you were at work or sleeping, then you open another micro trade.

4) When any one trade has more than 200% profit with respect to margin committed and you believe you are at a resistance point, consider unloading it.

5) Be patient when the market moves sideways. In terms of serious monetary strategies a week or a month is not a long period of time. Keep in mind that you are trading a carry trade pair so you will be paid to wait.

6) I firmly believe that eventually the AUDJPY pair will recover strongly. I'm willing to hold positions for long periods of time as I wait for this. If you don't believe this or you aren't willing to wait, then this strategy may not be useful for you.

Using the above method, with almost zero stress except for impatience during several weeks of sluggish movements, my trading account never committed more than 6% of it's NAV (using 50:1 leverage which is the maximum at my fx broker -- Oanda). However, this morning, as I've stated above, I could close out all my positions at a 10% NAV gain.

This is a simple trading system, though purists may balk at calling it a "system" due to its loose definition. Wait for a drop and buy tiny positions. Capture large profits when they present themselves. Be patient and don't accumulate too large a portion of your NAV. I'd definitely recommend using Oanda due to the ability to trade any size positions and the fact that you can't trade with extreme leverage.

Microtrading: Decent Returns?

I blogged about this idea not too long ago. The concept is to use very small trades relative to your available margin and net asset value (NAV). I'm doing this with the AUDJPY pair so that when I accumulate positions I am earning a positive carry trade return.

My trade size over the last week has been such that the margin involved in each trade is 0.2% of my NAV. That's tiny. Twenty five trades in and you are looking at using 5% of your available margin.

However, the carry trade interest would represent approximately a 3.65% return if annualized. At the same time my unrealized profits had me up almost 4% earlier this morning. This 4% unrealized profit is due to only the last 10 days of trading. We've had a downturn, I've accumulated positions, and the AUDJPY has jumped just recently.

Anyway, I hope this demonstrates that short term scalping is not the only way to earn money using forex. While this concept won't make you rich overnight the risk is very low and the returns can be good compared to currently available financial instruments.

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.

Poised For The Pop

As I mentioned a couple of days ago, I have been working on sinking some smaller positions while the AUDJPY was going sideways (or suffering a slow decline).

Today is the day that this bears fruit. Trading lower positions for higher positions now has me with some sunk positions that I can unload at a decent profit as the AUDJPY continues to spike.

Riding the AUDJPY Sideways

So, it looks like we've had several days of sideways motion on the charts. I don't mind at all.

As long as you buy on the low end and sell on the high end these are good times to play in the market too.

For periods of non-trending action I like to watch the stochastic and RSI indicators. The stochastic are reasonable but they do give a ton of false signals. The RSI can help corroborate their action a little bit.

Something I like to do, especially because I continue to expect a long term upward trend, is buy a long position and see what happens. If the movement is what I like to call rational, I'm willing to buy another below it. When the higher of the two long positions is profitable, I'll sell it.

This effectively replaces my higher position and makes it harder for the market to dislodge me with a downward spike. Then, because I do expect the market to go up over the long term, if it does, I can potentially have multiple well placed positions just waiting to reap in the gains.

However, as with anything, it's harder than it sounds and you'll want to use small position sizes.

EA Development

I was able to put some serious effort into developing an expert adviser over the weekend. At this stage I believe I can build something that will be both relatively safe and profitable.

This is not an easy task!

Anyway, I do want to assure you that I have no intention of ever selling an EA. If it works I'll use it for myself. If it doesn't work, then I'd have nothing worth selling in any case. Something I might consider, if I can't build a good one for myself, is selling the EA framework that I'm developing.

What do I mean by framework?

I mean that creating a good trading system involves managing a lot of complexity. I intend to create a framework that will let different EA components perform small sub-tasks as part of a larger whole. This framework would make it easier for any programmer to plug in their own components.

For example, I expect that my trading robot framework will include the following independent components:

1) entry point requester
2) pending entry point executor
3) open position analyzer
4) position closer

Entry Point Requester
When I use the visual testing tool provided by MT4 I inevitably notice that my entry points are not optimal. However, it is very difficult to manage an intended entry over time as other entry signals may be generated. The entry point requester will queue up entry signals for further analysis.

Pending Entry Point Executor
Knowing that an entry point signal has arrived, the executor will loop through the pending requests and see whether or not they should be executed. Think about it. Imagine if you forced all entries to be one or two pips better than they are using your current trading tool?

Open Position Analyzer
Okay, now that you have an open position what should you do with it? I find that putting in hard stops and profit points to be less than optimal. For example, if you are in a long term profitable trend it may be advantageous to allow more profit to accumulate.

Position Closer
This portion is relatively simple. If a position is marked as needing to be closed, then it will be closed. Using a system such as this can allow your longer term trades to execute where they need to execute without being concerned about the order entry limitations of your provider.

Good Trading!

Infrequent Nibbles

I'm getting into this small position size infrequent trading style.

For example, with a pittance of my capital at risk I am earning nearly a 5% annual return. What am I trading? I'm holding the ever popular AUDJPY carry trade pair of course.

Even with the recent wildfires in Australia I really don't see them falling off the map completely. Come on, realistically, how low can their dollar sink? Now that it is at these very low levels any given change in pips is magnified in terms of percentage moved. This gets amplified as the AUD falls relative to the JPY.

So, I have my average position displayed on my chart. When possible I'll try to snap up a small position when the price is relatively low. When it is relatively high I'll do the opposite. By this, I mean that I'll sell a position that was opened above the average price and take a profit.

At the same time, I'll pump a small amount of additional capital into the account on a monthly basis to ensure that I never have a significant total percentage of account value at risk. Given the economic mess that we are in I see this as a long term play measured in years.

Not Enough Time To Trade

Well, my days have become very busy as of late. I go to work early, come home late, and need to get some sleep when I am not swamped with the normal day to day duties of life. I need time to cook and clean, pay the bills, service the car, look after my home, watch the superbowl, do laundry, and so on.

While I've been making money I certainly am not making enough money to hire someone to look after all my day to day tasks.

Okay, enough whining! What, you may be asking, am I going to do about this?

I'm going to focus my energies on my job. It's interesting, pays well, and I can't afford to ignore it in the current economic situation. This means that I am going to scale back the amount of time I can trade.

To put it concisely, I'm going to trade very small position sizes and look towards lowering the average price of my open positions. This means checking my account once in a while, taking profit when I'm ahead, and opening more positions when I am behind. As a hands-off trader I'm going to have to trade in small amounts and make sure I have the longevity to wait for days at at time for a swing to give me some profits.

Trading A Longer Timeframe

FOREX Rethink
Though I've been trading the AUDJPY on a 15m chart quite a bit, and with reasonable success, I am thinking about moving to a larger time frame. Well, to be accurate, it's not so much that I plan to use a different chart. What I really want to do is accumulate positions over a longer period of time.

Do you know why?

Because, if I can accumulate a bunch of positions that are at some level of profit, I can make incredible gains during a longer term market move. For example, if you have an appropriate part of your account at risk, plus you have multiple in-profit positions protected by a stop loss, all of them will bring returns during an extended upswing.

Accumulation Strategy
To accumulate in-profit positions I have my charting software chart my average position price. When prices are above this level I'll sell a profitable position that was purchased above the current average price. Then, when the market moves south, I'll buy a new position further down.

It's important to use small enough positions when using this strategy as you may end up accumulating some trades while waiting for a suitable price swing. Using small position sizes gives you the flexibility to open and close positions, some of which may be unprotected, while you wait for a major move in your favor.

I find this type of trading improves my patience. You will end up thinking it may be worthwhile making another trade and then say, I'll wait for it to hit point X instead. Either the price will hit X or it must move in my favor! With this viewpoint it is very easy to wait and see what happens. Doing this, and catching a new low price point, for example, adjusts your average price and makes it easier to find a suitable position to unload on an upswing.

Accumulation Results
Based on my own experience I can suggest that your interim results will be reduced. You won't be entering and exiting trades as often nor will you be as concerned about capturing apparent tops and bottoms. However, once you find yourself on the right side of a longer term swing you can pull in significant profits all at once.

However, keep in mind, you are at risk of a major movement against your trades. You must be willing to trust a significant top or bottom -- to the point that if it fails you could end up suffering a margin call. This isn't for the faint of heart. Of course, you could always create a small sub-account specifically for implementing this type of strategy when you think you do have a known top or bottom.

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.

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...

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.

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!

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.