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Archive for December, 2009

When risk is not worth it

Check out the chart below. This is a chart of the Forex pair EUR/CHF (Euro against the Swiss Franc).

Forex Chart Dec 11

You can see that, in general, the pair has spent the best part of the last 4 months moving sideways. That’s not to say it has been a smooth ride though. I have highlighted a number of candlesticks on the chart. You can see the ridiculous levels of volatility on those days.

This pair has behaved terribly…from a daily chart perspective. If you had attempted to make a short term play on this pair on any of those days, incorporating any sensible level of risk management, chances are that you’d have been stopped out (then, just to make you feel worse, the price would probably have headed back and hit you target).

There’s just so much volatility, it’s almost pointless trying. You see this sort of behavior mostly with “exotic” currency pairs (think USD/TRY, USD/ZAR etc). Volume is so low that smaller amounts of people can cause violent moves like we see on this graph.

One of the main advantages touted about forex trading is liquidity…so much volume that no single person or group can overly influence the direction of a given pair (on purpose or not). There’s also a greater chance of stability, in general. All that goes out of the window for pairs like these.

There are other reasons why such instability could occur. In any case, the end result is the same: violent moves that can leave you bruised.

This underscores the negative side of setting stops. You have to pick your pairs carefully and ensure you give enough room so you don’t get stopped out of trades unnecessarily.

Sometimes, you just have to wait.

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The problem with systems

This can be summed up in one word…Patience. That’s it. You just have to wait till the stars align before you plunge. This can be a pain, especially if you’re an active trader in a market like this.

Sticking to your system demands that you do not take action until certain conditions have been met. In my case, that may mean when an oscillator shows oversold or overbought conditions, for instance, in addition to other technical signals. I also have to look at the markets to work out the general direction.

The latter part is where the problem really lies…direction; especially when it changes everyday, as it seems to be doing lately. When things are calm, you can usually count on a trade to play out in a certain way once it has been triggered. Either this will happen and you can do that, or that will happen and you can do this.

Now, fundamentals change everyday. The power of economic news has grown seemingly exponentially during this recession. It’s a kind of chaos.

The offshoot of that is that system traders (who, honestly, are the ones that can truly be profitable over the long term) have to show extreme discipline to keep making money.

I still have to try to work out the fundamental direction of the pairs I trade, even if it’s on a much shorter timeframe (for instance, a day instead of a week). I still have to scan the charts to search for my entry signals. I now have to pay much more attention to potential deal-breakers on the calendar.

I have to make sure that I have the wisdom to NOT pull the trigger if there are variables I can’t account for. Most important of all…when I do pull trigger, I can’t compromise on MONEY MANAGEMENT.

I have recently been stopped out of a few trades that later reversed and continued in the direction of the trend. This happened because I could only risk 5% of my account. It hurt when that happened, but I would never consider increasing my risk exposure.

If you can’t enter a trade with a reasonable level of risk (less than 5%…in general) then it isn’t worth it.

IF IT FEELS LIKE GAMBLING, YOU ARE NOT DOING IT RIGHT.

The recession is slowly passing away. The waters should calm down a bit soon. Till then, stay sharp.

Happy Trading.

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