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Aug 28 2009
One of the most stressful aspects of trading is the psychological impact a running loss may have on your trading. The other great aspect of cutting part of your position is that you instantly take some of the stress away. Faced with a big loss, most traders are keen to take a needless hit and stop the pain immediately.
Let’s take a run away trade example. Suppose you trade EUR/USD pair and is quite conversant with its behavior. Suppose you believe that the currency pair EUR/USD is overbought and is near the top. You believe the rate may fail near the resistance level 1.2453. You take an initial short at 1.2433.
You are looking for a swing trade back to the support level 1.1983. Your plan is to scale into the position. This is your first shot. You want to stay flexible. This will give you a 450 pip profit when you close your position on reaching this support level.
You expect that the maximum the rate would go is up to 1.2583. You place a 150 pips stop loss at 1.2583. This gives you a risk/reward ratio of 150/450=1/3. This risk/reward ratio is really good.
EUR/USD pair rallies taking out stops to print a new high of 1.2490 on reaching 1.2453 resistance level. You are not surprised. You knew it could happen so you had placed your initial stop loss at 150 pips.
You take advantage of the higher levels to place your second short at 1.2493. Now you are two short at an average cost of 1.2493+1.2433= 1.2463. You replace the stop loss of 150 pips with two stop losses of 75 pips each (150/2).
The EUR/USD pair begins to sink. You are happy. You plan to place a third short when it reaches the level 1.2383 (70 pips below the initial resistance level of 1.2453) since that will be an indication that the momentum is picking up steam to the downside.
The EUR/USD pair does not break that level. It rebounds at 1.2463 and is soon testing the highs again. You are unfortunate again. During this rebound you can choose either to cut the trade at cost or stick with it. You could have closed your position at 1.2463 taking a loss of 30 pips on your first short and a profit of 30 pips on the second short to end up with a zero loss. Learn
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The rebound does not take place and the rate continues to go up and reaches the 1.2470. You did not close your positions instead you had decided to let the rate go up with a belief that the pair will rebound after going beyond 1.2500 level.
Still you are expecting a rebound around 1.2503 so you decide to throw all your cards by going short again at 1.2473. Now you are short 3 lots average 1.2503+1.2493+1.2433= 1.2466.
Aug 28 2009
There may come a point in your trading career when you find yourself in a trade that is deep underwater. If you continue with the trade you may get your account wiped out. One of the most important lessons any forex trader needs to learn is how to get out of a losing position. First practice on your
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Let’s still suppose that there is a run away trade confronting you. Although in my opinion if you follow proper money management rules, this type of situation should never arise. What we are talking about is a run away position that has the potential of wiping out the equity in your account.
Most traders have two choices when holding onto a big loser. 1) Cut the position immediately and avoid a huge loss. 2) Try to average down and hope for a turn around in your favor.
In one you should accept a big monetary hit. In the second approach you place all your chips on the table and hope for the best. Neither approach is attractive. Good news for you. There is a third way those great traders always use.
Great traders simply refuse to take an outright loss by way of a stop. Once they realize that the market has proven them wrong they slowly begin to trade their way out of a losing position.
So once you realize that you have a losing position that you need to get out, your mission should be to better your average cost without adding to the position. Adding to the position will only create more pain and sorrow for you.
You need to cut part of it to create a more breathing room for yourself and be able to trade out of the rest. Adding to a losing position can also quickly take away your flexibility as the loss grows and becomes unmanageable.
Suppose that you had gone short in a downtrend. After sometime the trend suddenly reversed and turned into an uptrend. Now you are in a losing position because the trend has reversed. You have three choices with you:
1) Get out of everything and take a substantial loss. 2) Hold onto the losing position and hope that the trend will again reverse itself before you receive your margin call. 3) Cut part of the position on any reasonable dip.
There are two benefits of cutting your position on a dip. Firstly, you are in fact freeing up liquidity to react to future price moves although you are going to take an initial loss. Any move now is a good move.
You can reload at better selling levels to improve your average cost If the currency pair bounces higher. On the other hand, if it immediately collapses then great, it is moving in your direction.
Aug 27 2009
Forex Online News: China and the US debt.
So I was reading a story in the Wall Street Journal last night and I came across a well muted tidbit of information that, if it continues, could serve to hurt the Dollar in the near and demolish it in the long term.
China, the US’s largest investor, sold off a significant chunk of its T-Bills in June. Now, in recent months there has been much talk from China about their concerns regarding the US’s debt load, but trust me on this, they would not be selling the debt at this time if they did not have to.
If they did, they stand to lose a serious amount of money if the prices go down based on the sheer volume as well as psychological implications of the act.
According to other sources I read after my curiosity was peaked, it seems as if the Chinese government is spread a bit too thin right now – having increased their feverish purchase plan of almost every natural resource in the Eastern hemisphere while investing heavy in mineral and oil excavation Africa as well.
In an economy that thrives on exports to be spending as large as they have been under conditions that are being equated with the Great Depression is just plain crazy – and culturally it was probably not easy for them to stop when they realized this.
Culturally, the Chinese are all about not making mistakes or miscalculations and while they were saying things were fine, they were really not.
The theory here is that the Chinese need to unload some of the 3 Trillion greenbacks they have to raise cash – by no means am I saying that China is in trouble, but they are not as well off at this point as everyone thought. If this is the case, Forex traders can worry if they are long Dollar positions.
The fact is, the Chinese have so much impact on the Forex at this moment based solely on their reserve levels, that the hint of a selloff would panic the market.
I don’t believe the Chinese want to hurt the Dollar, I will say this a thousand times, it is not in their interest to do so.
I just think that their needs might inadvertently lead to this and there is nothing anyone can do about it. For now, I will keep my nose in the online Forex world and ears to the whispers – perhaps I can help make more sense of this as the weeks go by.
More online So I was reading a story in the Wall Street Journal last night and I came across a well muted tidbit of information that, if it continues, could serve to hurt the Dollar in the near and demolish it in the long term.
China, the US’s largest investor, sold off a significant chunk of its T-Bills in June. Now, in recent months there has been much talk from China about their concerns regarding the US’s debt load, but trust me on this, they would not be selling the debt at this time if they did not have to.
If they did, they stand to lose a serious amount of money if the prices go down based on the sheer volume as well as psychological implications of the act.
According to other sources I read after my curiosity was peaked, it seems as if the Chinese government is spread a bit too thin right now – having increased their feverish purchase plan of almost every natural resource in the Eastern hemisphere while investing heavy in mineral and oil excavation Africa as well.
In an economy that thrives on exports to be spending as large as they have been under conditions that are being equated with the Great Depression is just plain crazy – and culturally it was probably not easy for them to stop when they realized this.
Culturally, the Chinese are all about not making mistakes or miscalculations and while they were saying things were fine, they were really not.
The theory here is that the Chinese need to unload some of the 3 Trillion greenbacks they have to raise cash – by no means am I saying that China is in trouble, but they are not as well off at this point as everyone thought. If this is the case,
Forex traders can worry if they are long Dollar positions.
The fact is, the Chinese have so much impact on the Forex at this moment based solely on their reserve levels, that the hint of a selloff would panic the market.
I don’t believe the Chinese want to hurt the Dollar, I will say this a thousand times, it is not in their interest to do so.
I just think that their needs might inadvertently lead to this and there is nothing anyone can do about it. For now, I will keep my nose in the
online Forex world and ears to the whispers – perhaps I can help make more sense of this as the weeks go by.
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Aug 27 2009
The pair EUR/USD continues to go high. It reaches 1.2480. You again reduce your stops to 50 pips each for the three lots (150/3=50). You decide to disregard all the money management rules and remove the stop with the belief that this high rate for the pair EUR/USD is unsustainable. The pair is overbought and it will reverse soon. This will give you the time to cut your position when it does.
Whenever the market is faced with something it can’t do. It proceeds to do exactly that. Trying to out think the market is never a bright idea. This is because the traders just like you who have been caught on the wrong side of the market are all sitting on the same trade and are vulnerable.
This simple trade is now looking like it may very well take a large chunk out of your account. The EUR/USD rate reaches 1.2550. You are in trouble now with an unrealized loss of 107+57+47=211 pips. First practice on your
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The stress level increases. You are tempted to simply stop the pain, get rid of it all and regroup. Stubborn traders may be tempted to double up and bet on a decline.
Pride has no place in forex trading. The market proved you wrong and you need to move forward. The pair EUR/USD does not want to reverse any longer and is set on going beyond 1.2550 level.
The one thing that can save you during this bad time is that currency rates do not move straight up or down. Currency rates have a tendency to make a move, consolidate then continue. This stair case pattern is evident in most financial instruments. It simply indicates the accumulation/distribution stages of a move.
You should consider these consolidation periods as your window of opportunity. Longs may take some profits and the shorts may get stopped out and both need time to set new positions.
You look for a dip to free up part of your position. You get rid of one lot at 1.2553 taking a realized loss of 107 pips. Now you have two lots short. Taking a loss hurts but we have now given ourselves more flexibility and more margin.
We wait for a range to develop. This soon takes place as a rough 100 pips range develops and trades for several days. You realize that a range has developed. You actively start to trade it with the third lot. Know
range trading.
By trading the range that inevitably develops after each uptrend or a downtrend, you can cut your losses. This technique proves effective. You are nimble enough with intra day trades to quickly pocket a good amount of pips to offset some of the loss that you have taken by removing all the stop losses.
This way you can reduce your loss. The currency prices can never go up and up and up. It will at one point pause and try to consolidate. You have taken advantage of this fact. Lesson is to reduce your total exposure and try to manage it instead! But sometimes it is always good cut and run. You be the judge of your decisions.
Aug 27 2009
You can simply use common oscillators like the Stochastics or RSI (Relative Strength Indicator) to help identify potential turns at or near support or resistance when you have established a range. Learn
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A Stochastic indicator identifies swing, tops and bottoms. The Stochastic indicator measures the position of the currency pair compared with its most recent trading range. You must have heard the terminology of the stochastic indicator being overbought or oversold.
As the currency pair price rises, the closing price tends to be closer to the extreme highs of the currency pair. Specifically a stochastic indicator measures the closing price of the currency price and it’s high or low during a specific number of days or weeks.
The closing price tends to fall on average closer and closer to the extreme lows when the price falls. Stochastic indicator points our overbought or oversold conditions and is considered to be a highly accurate method of picking the tops and bottoms.
Depending on where the price closes during a given period, the Relative Strength Indicator (RSI) is designed to indicate the market’s current strength or weakness. The RSI is plotted on a 0-100 scale.
The buy and sell signal levels will vary depending on the length you choose for the RSI calculation. A buy signal is usually generated when the RSI moves up through the lower band usually at 30. Similarly a sell signal is usually generated when the RSI moves down through the upper band usually at 70.
A shorter length time frame will result in the RSI being more volatile. A longer length time frame results in a less volatile RSI. However, most prices seem to change direction at 30 and 70. However, note that this is not a hard and fast rule.
How do you know when to buy and when to sell in range trading? The most common method of reading these oscillators is to identify the point at which they cross the line exiting overbought or oversold which signals a possible turn in the direction of price action.
Beside oscillators another turn confirmation can be found at the break of an intra range trendline. Although using a trendline break confirmation can result into a late trade entry, it is still a valuable confirmation that the turn in the range has indeed occurred.
Range trading can be an effective method of trading when the forex market is not trending. A tighter stop loss can then be placed on the other side of the trendline break as opposed to the other side of the range support or resistance.
During the time the forex market is bouncing back and forth between horizontal resistance and support, the traders can take benefit of the range trading methods. If the established range has sufficient height, range trading the bounces can be an effective trading method under these non trending market conditions.
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