Archive for August, 2008

Taking Profits — Knowing When & Why

By FX Insights

Taking Profits — Knowing When & Why

The concept of knowing when and why to take profits on a particular trade is an area I’d say most traders struggle with… how far do you let a good trade run? When do you place a take-profit order/stop, etc.? 

Here’s an excerpt from an email I was recently sent. I will use this question as my basis for covering this issue of when to take profits…

Mod,

One question that comes to mind is in the area of taking profit. You 
have written a lot about your +1 stops but what I would like to further 
understand is when you take profit.

I may be completely wrong, but it comes across in the chat that you seem 
to give away a fair bit of profit allowing a fantastic entry that goes 
the way you expected get stopped out for +1, when you may have closed it 
for 50+ pips.

First of all, there’s no cut-and-dry, set-in-stone answer to this question. But in this post I will tell you how I do it and why I do it. It’s up to you to decide for yourself how you handle the issue of when to take profits… 

For me, each and every trade has its own unique gameplan. No two trades are exactly alike and are taken for the exact same reason. When I take a trade, that trade is only taken after it meets a specific set of criteria. I try to avoid taking knee-jerk trades or making reactionary trades. 

There are three types of trades that I take: scalp, intraday, and swing trades. Real-time market conditions will typically dictate what type of trade I take at any given moment. 

In general, here’s what I look for with each trade type:

Scalp: this is a trade that is typically closed within 8 hours or less, looking for 10+ pips. 

Intraday: this is a trade that is typically closed within 48 hours of being opened, looking for 40+ pips.

Swing: this is a trade that is typically opened for more than 48 hours, looking for 100+ pips. 

Now, I’m going to break down each trade type and explain when I would typically take profit, when I would use the +1 technique, and when I would let a intraday or scalp trade evolve into a swing trade… 

Scalp:

Scalping is something I do the least of at this point as I’ve seen that bigger money and better ROI can be made trading on an intraday and swing basis. There are times, however, that the euro will fall into a no-brainer predictable range and it’s easy to pick the market’s pockets for 10, 15, or 20+ pips per trade. 

I do not scalp on Sundays or Fridays. I do not scalp 4 hours prior to big fundamental data releases or central bank events, or central banker speeches. I do not scalp 2 hours prior to Frankfurt opening and I do not scalp when London and NY are getting ready to open or within the first 2 hours of Frankfurt, London, or NY being opened. 

My preferred time to scalp is after 7:00 p.m. EST and typically no later than Midnight EST. I like to take profits on my scalp trades before Midnight EST. I also prefer to scalp after the EUR/USD has made an extended 220+ pip move.

No matter what I my near-term and short-term bias for the EUR/USD is, I will trade both directions when we’re in a predictable range. I can use my 30-minute price openings and watching the real-time price action to determine the support/resistance within a range and to scalp it accordingly. 

The more you watch the price action of the EUR/USD, the more familiar you’ll get with the EUR/USD’s personality and you’ll know when it’s “safe” to scalp a range without fear of getting caught in a breakout that goes counter to your scalp trade. Finally, I almost never use the +1 technique on a scalp trade. 

Intraday: 

I typically look to take an intraday trade after London has been opened for at least an hour. I like to see what the market does during the initial two 30-minute timeframes of London. My preferred time to add intraday trades are after 9:30 a.m. EST. 

If I see an intraday opportunity during Frankfurt or early London I will take that opportunity, but it’s rarer that I trade those timeframes as I do not like the chaos that can go on when those markets open. I prefer to just watch, let the dust clear, and then get a better sense for what the market is going to do between then and 5:00 p.m. EST. 

If my intraday trade is counter to my near-term and or short-term bias, I will typically put a +1 on the trade once it’s in profit 10+ pips as I’d rather just make 1 pip instead of letting the trade go into drawdown and I may look to re-enter at a better entry. 

If I have an intraday trade open and we’re getting close to a session or timeframe that could add a new level of liquidity and volatility, I may close that trade out and secure my profits. I will typically take an intraday trade, for example, after we’ve done something like open lower for 7+ 30-minute timeframes… in this case I would probably take a euro long, looking for at least 50 pips. 

If we have a situation where we’ve moved 220+ pips between Frankfurt/London and the end of NY session, I will typically take an intraday trade, going opposite of that extended move and profiting from the potential retracement that is typical. 

Also, depending upon my available margin, I may take two or more intraday trades that are stacked 10 or more pips apart. For example, let’s suppose I took three intraday trades, EUR/USD longs – the first long at 1.5405, the second long at 1.5390, and the third long at 1.5375. As the euro would begin to move up, I would likely close the 1.5405 first, maybe for a pip, 5 pips, 10 pips or more (depending upon market conditions) and the other two would remain open as they are better entries. 

The euro continues to move up and maybe I close the second one from 1.5390 for a profit of 25 pips, leaving the third long as my bread and butter intraday. Let’s say I took 10 pips on the first long, 25 pips on the second long, giving me 35 total pips, and the third is still open. If I see in the real-time price action that I can get more than 50 pips on my bread and butter long, I will do so. Or, if I see we’re running out of steam to keep moving up, I’ll lock in my profits with 50 pips, giving me a total of 85 pips from all three trades. 

Sometimes intraday trades turn into swing trades… 

Swing:

Swing trading is a completely different concept as opposed to scalp and intraday. It’s more of a science and an art and requires a tremendous amount of patience and not letting your emotions and the “noise” of the market cloud your thinking. Swing trading, in my opinion, is really the only true way to make serious profits and ROI in the FX market. 

I will almost always have one or more swing trades open and I can have both long and short swing trades open simultaneously. As of the writing of this post I have a euro long swing open at 1.4595 and a euro swing short open at 1.6011. The market is not anywhere near either one of those positions at this point, both are in tremendous profit, and both will be closed, at some point, for no less than 100 pips. 

Under current market conditions and based on current EUR/USD price action patterns, I will typically begin to look for swing trades after the EUR/USD has corrected down 600-800 pips from a high top or has moved up 1200-1500 pips from a low bottom. Again, this is not set-in-stone, but more of a rough guideline, as always, real-time price action and real-time market fundamentals will always ultimately dictate when I take a trade… my trades will ebb and flow as the market ebbs and flows… 

With swing trades, suppose I have three or more swing trades open, the “worst” of the swing trades will typically be closed after its gained 100 or more pips of profit. Now, if I see a situation like we’ve had since the middle of February, I will keep those swings open for well above the 100 pip profit target… for example, I recently closed a 1.4631 at 1.5841. Reason being is because I started shorting everything above 1.5850, so I used that price zone as a place to close out a euro swing long that was higher than a few of my better euro swing longs. 

Hopefully this all makes sense and gives a better idea of when and why I would take profits on a particular trade. No matter what, I almost never give an exact target on a trade. I cannot and will not paint myself into a corner like that. If I take a scalp trade and the euro does a mini breakout, well, I’m going to capitalize on that and not lock myself into just taking 10 profits… 

If you have any questions or need something cleared up, please ask.

August 6, 2008 at 4:20 pm 1 comment

Key Levels

By FX Insights

Key Levels


Prices are moving up but there’s not much momentum behind the move. I’m expecting a test of the 1.5500 level and if it breaks and runs out of steam, I’m shorting it. 

Key upside levels:

1.5498
1.5518
1.5533
1.5548
1.5562

Key downside levels:

1.5448
1.5429
1.5401
1.5378
1.5354

Be advised we have two big event today: German Factory Orders, which should suck. I’m expecting a print below expectations in addition to a 45% probability of it printing negative. Then later we get crude inventories. With crude being in the limelight this week I can be sure that report will cause the market to jump and the euro to follow which ever direction that jump is in.

August 6, 2008 at 4:06 am Leave a comment

Trade Team Update – – 8/5/08

By FX Insights

Trade Team Update – – 8/5/08

Leading up to this afternoon’s FOMC rate decision and policy statement the euro continued to sell-off in addition to commodities selling off as markets were preparing for strong hawkish FOMC statement. 

The fact that our market is still waiting for Trichet’s performance on Thursday means that we’re not going to get a whole of information out of the EUR/USD, but I’m getting plenty of information from equities and commodities right now in addition to Fed Funds Futures and the USD Index. 

First thing I want to do today is dissect the FOMC statement and tell you what I believe the Fed’s message to the markets is. Then I’m going to tell you what I’m reading within the other markets and how this can potentially impact moves in the EUR/USD in the short-term. Basically you’re going to read my thought process in the best of my ability to put it all on paper.

As far as the FOMC statement is concerned, I’m sure the big question being debated is whether the rhetoric was hawkish or dovish. Well, it was both. What else do you expect from the Fed? They hire brilliant copy writers to craft these kinds of messages that are vague and aloof. That means I need to read between the lines to decipher what the Fed is trying to tell the markets. 

Economic activity expanded in the second quarter, partly reflecting growth in consumer spending and exports.

That’s a hawkish USD+ comment. But, we know why GDP saw gains and the consumer sector was supported… because the Treasury fired up the printing presses and mailed billions of dollars worth of “free money” to taxpayers, and those taxpayers did exactly as we knew they would – spend, not save, but spend. Overall, this comment is a wash because it’s good news, but we know why the news is good.

Labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and elevated energy prices are likely to weigh on economic growth over the next few quarters.

Those are dovish USD- comments. We know how ugly the financial markets are, how tight credit is, how nasty housing is, and how the price of energy is. Plus, as I mentioned above we know why growth expanded in the second quarter and why it won’t expand as much in the proceeding quarters. Although these comments are USD-, the markets already know this stuff and there’s no strong new rhetoric to describe how dire those sectors are. 

Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.

I like this comment. It’s not hawkish USD+. It was this comment that sent equities up and kept the euro from taking another beating (for now). Reading between the lies, this is where the Fed is telling the markets they have no intentions of raising rates anytime soon. In fact, they have no real timeframe on when they’re going to raise rates. They are telling the markets that the 325bps worth of rate cuts still need time to cycle through the economy and through the financial markets. 

But, this comment isn’t really going to help the euro much because we know the next bank that is likely to cut is the ECB and that the next bank to raise rates is the Fed. This comment also took down Fed Funds Futures and pushed back probabilities of a Fed hike over the next two meetings. So overall this comment is not going to help the euro much but it certainly doesn’t hurt it. 

Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities, and some indicators of inflation expectations have been elevated. The Committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain.

These two comments are double-speak and flip-flopping at its finest. First, they tell the markets we have an inflation problem, then they say they expect inflation to ease, and then they finish off by saying they really have no idea what inflation is going to do in the near-term. 

This kind of flip-flopping is a wash for the USD. Inflation is real, it’s happening, and it’s not going away as long as the Fed keeps interest rates artificially low and keeps pumping up the M3 money supply. The more inflation we keep importing from China, the more this will weigh on things like the Import Price Index and CPI. 

Wall Street really liked those comments. The was the Fed’s way of signaling to Wall Street that they know there’s an inflation problem but they aren’t going to fight that inflation problem with rate hikes any time soon. Wall Street also liked the fact that there was only one dissenting vote, but that was from the biggest hawk on the FOMC, so there’s no real surprise there. 

Bottom line is, the Fed’s not freaking about inflation and when you read between the lines you see they are telling the markets their overall main concern is the smooth functioning of financial markets and that inflation is still just a secondary concern but not enough of an issue yet to go into a rate hike cycle. 

Although downside risks to growth remain, the upside risks to inflation are also of significant concern to the Committee. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.

And that’s the last of it there… that’s the Fed’s way of telling the markets they are still in control and will stand ready to protect the interests of the U.S. economy and U.S. financial market. This is more of an endearing attempt at the Fed trying to gain back some credibility. Nice try, I still think they suck. 

In my view the net bottom line on this FOMC is that the statement is slightly more on the dovish side, but intended to send a message to all markets. The message to equities was that they’re not raising rates, so keep buying with cheap money. The message to commodities is that they’re watching them closely and will keep manipulating to bring their prices down. The message to currencies is that monetary policy is on hold and they’re still not too concerned about the weak dollar, so keep having your way with it, up or down. 

Reading markets:

Another reason I don’t spend anytime looking at candle charts and colored lines crossing is because I’d rather focus my eyes and my mind on the global markets as they are tremendously valuable indicators for our market because each of those markets are directly tied into each other. 

After the FOMC statement was released the Dow went up and bond yields went up. There was a strong message within the price action of those markets… the message was that money flows were coming out of securities and into equities because the Fed would maintain a dovish stance on rates, would keep money and credit cheap, and would keep Wall Street supported. 

That type of message is not very supportive of the USD, however. The problem is the message the Fed sent to commodities. Gold is train wreck right now and is weighing heavily on the euro. The sell-off in gold has been dramatic and has sucked the euro down with it. I’m no gold expert, but that thing is a mess and I’m not sure if the bleeding will stop in the short term. 

The issues with oil are very much the same. The latest “excuse” for oil’s sell-off is that demand is down. I’m not exactly buying that reason but how can demand drop so dramatically that in just three weeks time that it would send crude down almost $30? 

Regardless of what the reasons are, it is what it is. Crude is weak, it’s selling off and if it keeps selling off the euro will keep selling off. Pretty simple. 

So for at least the rest of this week I’m going to keep an extremely close watch on the markets and the market correlated variables to see how their price action is responding to not only the FOMC but especially to how they respond to Trichet. 

EUR/USD:

As I’ve said all week, I’m not buying the euro. I don’t care if the angel Gabriel came down with a trade call from God to buy the euro, I’m not buying the euro. I’m selling every rise and I will keep selling every rise. 

The only way I’m going to buy the euro again is when I see the momentum to stop sliding goes away and I see commodities turn around and I see the euro’s price action show the potential of gaining some traction to make a move up without getting smacked down by the dollar. 

I believe we have more room to fall. Especially if gold and crude continue to sell-off and equities continue to gain. If those two factors work hand-in-hand, there’s not much hope for the euro to rise because fundamentally, the euro is up against the ropes vs. the dollar right now. 

I don’t expect any monumental moves because we still have the ECB and Trichet on Thursday. I believe Trichet is going to carry more weight than this FOMC statement. He’s more credible than Bernanke and I believe he holds more power to cause a reaction in our market. 

So, until I see what happens on Thursday and listen to what Trichet has to say, I have little commentary on the euro. I’m still bearish and I’m selling any rises.

For those of you who’ve patiently held our Trade Team Call to short the euro at 1.6010 and above, my promise of 500+ pips was realized today, so congrats to all of you that we’re waiting patiently for that payout. I’m holding mine open for 1.4700 or better, but that’s just me. This is a real swing trade, so I don’t mind paying the interest and keeping it open through the ups and downs. 

Later on tonight I will post some key levels. If I see anything happening, I’ll do additional updates. Be smart with your trades and please do not over leverage. 

-FX Insights

August 6, 2008 at 4:00 am Leave a comment

Trade Team Update – – 8/4/08

By FX Insights

Trade Team Update – – 8/4/08

Today’s market action was so crazy and disjointed I had to step away from my computers early this afternoon, clear my head, take my mind off the market, and focus on more pleasant things…  

But now we must focus on the FOMC as it’s potential puts both the euro and the dollar at risk tomorrow for very distinct reasons. 

First, lets re-cap today’s events… all USD data printed to the upside today, which capped any euro gains. You may recall the euro made a quick spike up this morning, but what I was seeing within that price action was short contracts being taken, which drove the price up “artificially”. And I believe these short contracts were being taken in preperation for this week’s Fed and ECB events. 

That spike up hit my 1.5632 key level to the pip and totally ran out of steam to push any higher… and those that have been following my updates should have easily known I was shorting at those levels and I’ll be holding those fresh shorts into tomorrow’s FOMC. 

I have to mention commodities as well. With the Personal Spending data printing lower than last month’s reading, this sparked a sell-off in the crude pits which in turn brought gold down, which in turn brought the euro back under the 1.5580 level. 

Enough history, lets talk about the future now…

FOMC:

To be honest, I don’t see tomorrow’s FOMC rocking the markets in Biblical proportions… yes, the market will move, the market will react, we will see price swings, we will see volatility. 

But, the Fed is not going to move on rates and it’s my opinion that Bernanke is going to temper his words and not say anything to cause any major upheaval.

Bernanke cannot possibly be anything but dovish on growth, employment, housing, the consumer, and overall economic conditions. Economic conditions have further erroded since the last FOMC meeting. But, what has changed is the price of a barrel of crude. 

The Fed’s market manipulation between the last FOMC meeting and this one has worked to beat crude down, drop gold, and push the USD up to manageable levels. 

The Fed and the economy is in no position right now to handle a skyrocketing, rapidly appreciating dollar. The Trade Balance and Current Account cannot deal with a fast strengthening of the dollar. 

Wall St. is in no position to handle rate hikes… the housing market would completely implode if the Fed upped rates. Unemployment is at a 4-year high and the economy has been bleeding jobs all of 2008. 

I do expect to hear hawkish tones on inflation, but they will use the phrase “inflation expectations” and we won’t hear any reference to actual, physical, real life, day-to-day, hit-you-in-your-wallet inflation that the American consumer is suffering from. 

Here’s where the EUR is at risk: what can the Fed possibly tell the markets that they don’t already know? Can the Fed paint a picture any uglier than it already is? I think you can see where I’m going with this… 

My opinion is that no matter what the Fed says, the USD is going to keep strengthening and keep beating up on the euro. Of course anything is possible in this market, but I think the only way the USD can give up any significant gains against the EUR is if the Fed reveals new and damaging information on the U.S. financial system and on U.S. banks. 

As I said yesterday, I cannot predict nor will I speculate on what the FOMC statement is going to say, but my feeling is that when it’s all said and done, the USD wins and the EUR loses… sure, it might not be an instant move, it may take a few days or a week, but my view is that all risk is on the EUR with this FOMC.

For tomorrow it’s all going to boil down to what Bernanke says in the statement… and the key is how Fed Funds Futures responds to the rhetoric in the statement… Fed Funds Futures is a great indicator post-rate meeting to get an idea for what the market intends to do with the EUR/USD. 

Needless to say, I’m pumped and I’m ready for any FOMC madness. I’m tired of these dumb ranges and I’m ready for either the USD or the EUR to get a proper beating… I don’t even really care which one gets it, I’ll make money either way. 

EUR/USD:

It shouldn’t be too hard to figure out my gameplan… I’ve been bearish on the euro for a better part of two months, this has been no secret to FXI, and I will be shorting the crap out of the euro on any rises we get… 

So far on this drop the 1.5520 level remains strong. It was tested last week and held and right now it appears to be holding again. And when we bounce back up off these levels I’m shorting again, and shorting again, and shorting again… 

I’m shorting any rise the market will give me because those are silver platter trades that will pay off even if they go into drawdown.

Right now I don’t have much to say about the EUR/USD because it all hinges on what the FOMC tells the markets tomorrow. Clearly we’re seeing market players position themselves short but this doesn’t necessarily mean much to me. 

There are too many idiots that trade this market and they are always losing, so I don’t really care what the market sentiment is, my number concern is the fundamental aspect of the market, namely the FOMC. 

Believe me, Ben Bernanke doesn’t have a candle chart open with Fib lines and moving averages while he’s crafting his speech and preparing the FOMC statement… he’s not taking into consideration where the trend lines are and correlating that to what he’s going to say in order to respect tech indicators… sorry, but that’s not how things work in this market. 

This is why the underlying fundamentals of the market are so critical and why price action is king and will always be king. 

I can’t expect the FOMC to make things any clearer to the markets tomorrow, but I will be watching and dissecting nonetheless, and of course depending upon the price action to lead the way. 

You know what’s at stake tomorrow, so prepare… if I see anything in the market I will update accordingly. Be smart…

-FX Insights

August 5, 2008 at 4:45 am Leave a comment

+1 Risk/Money Management Technique

By FX Insights

+1 Risk/Money Management Technique

This post is going to explain what the +1 risk management technique is, why I use it, how it works, and specifically how I use it to manage risk, manage my money, and prevent my trades from going into drawdown and sucking the life out of my equity and usable margin. 

The +1 technique means this – it’s placing a take-profit limit on a trade or several trades that have a much higher probability and potential of going against me… trades that are contrarian to what the market is showing me it wants to do… trades that could easily go into 100 or more pips of drawdown… trades that are counter to what all of my indicators are telling me. 

The +1 take-profit order simply closes out a trade if the market moves against that trade. The trade gets closed out for 1 pip and my margin and equity is protected from drawdown. 

Take-profit limit – this is what I call an order that I place on my trade station to automatically close out a trade at an exact price point. Some people call these stops or stop orders. I don’t like to use the term stop because it carries a negative connotation. Other people simply call them limit orders. I call it a take-profit limit because that’s how I see it in my mind and that’s what it does, it takes profit. 

Now, I’m going to explain the rest of how this works and what the parameters are in a FAQ style because these are the most common questions I get…

Why do you use this +1 limit if you really don’t care about drawdowns?

Generally, I could careless about drawdowns. When I have a trade that goes into drawdown that is in the direction of where I know the market wants to go, it makes no difference to me. For example, if I’m forecasting the EUR/USD to go up and to continue an upward directional move in the near-term and I take a euro long that goes into drawdown, it doesn’t matter because I know where the market is going and I know it’s just a matter of time before my negative entry turns into a positive entry, so it’s no worries. 

I almost never use the +1 on a trade that is taken with the prevailing trend of the market. Again, if I think the euro’s going up and I take a long, I’m not going to put the +1 limit on it. There’s only one case where I will use this on a trade taken with the prevailing trend – if I am forecasting the euro to go up in the near-term but I see something within the real-time price action to indicate we may see some temporary drawdown, and I take a long, I may use the +1 to close me out but only so I can buy again at a lower level. In that case, yes, I will use the +1 so that I can simply enhance my entries for better ROI. 

When do you most often use the +1 technique?

I most often will use the +1 limit-order technique when I take a trade that is in direct opposition to everything I see in the market. If the fundamentals and the market correlated variables and the price action is telling me to go long on the EUR/USD and I decide to add a euro short, there’s a good chance I’m going to throw on the +1. 

For example: if gold and oil are moving up, the USD fundamentals are all negative, the price action is showing momentum to move the euro up, and my overall bias is to be euro long, yet I decide to take a short, I’m likely going to use the +1 on that euro short. Plus, if I’m biased euro long and I know the tech traders are shorting and I discover where their stoplosses are set at, 100% of the time I’m using the +1 technique. 

Why do you take trades that go against your market analysis and forecasting?

First of all, the EUR/USD does not move in a straight line. If my general bias and forecasting says that I should be euro long and we make a 220+ pip move in a trade day, I’m taking a short. Yes, that trade is counter what my forecasting tells me, but I also know the patterns of the EUR/USD and based on those predictable patterns, the smart trade is a short, not a long because taking a long after a 220+ pip would be a really dumb trade and a trade taken at the top of a range. 

One of the main reasons I take trades counter to what the market is telling me is because I want to take a trade on a position basis or a swing basis. For example, I’m net euro long and my market forecasting is telling me to stay euro long and the price action is telling me we have a greater probability of continuing to move up. Let’s say the EUR/USD has moved up 1200 pips over a 3-week trade period, so I decide to add a EUR/USD short. 

That would be a position trade, a short taken on a swing basis. It’s not a hedge, it’s simply a position trade. The trade gives me a position in the market and should the market want to top out after making an extended 1200 pip move, I’ve got a short in and can ride that short down during the time of correction. 

In this scenario I may use the +1 or I may not and simply let the trade go into drawdown or even take a loss on it and re-short at a higher price level. If I take a position trade or a swing trade what dictates whether or not I use the +1 largely rest with the real-time factors in the market, mainly whatever the price action is telling me. 

Again, let me be clear, hedging and position trading are two totally different things and two totally different concepts of trading. I do not hedge and do not ever recommend anyone to hedge. Hedging is an exact science, and no offense, but it’s an exact science most retail traders never get the grasp of and will cause a margin call. 

In the past I’ve hedged but only out of necessity because I’ve overleveraged or overtraded an account and my hedges were pure protection measures. This is a situation you never want to get yourself in because you then have to trade your account like a skilled surgeon performing a life-threatening operation on a dying patient. 

If you don’t over leverage your account and you learn how to use the +1 technique on trades that have a higher degree of falling into drawdown, you will never need to hedge your account… very simple. 

And now for the biggest question…

Exactly when do you put on the +1?

As soon as you take a position in this market obviously you automatically go into drawdown until your trade at least moves to cover the spread. This might sound like a no-brainer, but let me be clear – I do not put on the +1 as soon as I take the trade. That would just be stupid. 

Typically, under most circumstances, I wait for the trade to go 10 or more pips in the positive before I put on the +1. If the trade never goes into the positive but stays in drawdown, at that point I either have to decide to ride it out or determine how much I want to give back to the market and cut my loss. 

The reason why I wait for the trade to go 10 pips into the positive is because if I took a euro short, which was counterintuitive to what the market was telling me, and we jump down 10 pips, which would put me in the positive by 10 pips, that jump down could just be the markets natural reactionary drop to more euro longs being taken. 

So, my euro short is up by 10 pips, I put on the +1 take-profit limit, and then the market starts moving back up, it hits my limit and keeps going, I get closed out, I make a pip, and I’m not stuck with a negative entry… very easy. 

What do you consider when trying to decide whether or not to put on the +1?

Really, the exact same factors are always considered whenever I take any trades… what is the price action telling me? How many pips have we moved today, this week, and the past 3-4 weeks… what is gold and oil doing? How have the fundamentals been printing? What kind of momentum is the price action showing based on how much liquidity is in the market? All of things we talk about every day in the chat and in the daily updates… 

Some traders will laugh at this technique… they will mock and ignorantly think that I’m “only making a pip on a trade, big deal…” That’s fine, I really don’t care. They are missing the point of this style of trading, which is to protect my account from unneeded drawdowns and from the market sucking up my usable margin and equity. 

Again, this +1 is more of an exact science and will take some fine-tuning if you are new to using it. Now, this technique will never work for you if you don’t have the ability to do some basic market forecasting and you can’t get a nominal read on where the market is going. If you have no clue what the market’s doing or what it might do, using this technique will just keep closing you out of trades that would likely be profitable. And then you’ll blame me for constantly stopping you out… I’m already prepped for the hate mail… 

But, if you have even a halfway decent ability at reading the price action and you are more fundamental in your approach to seeing the market, I really believe this is a great tool that can be used to protect your account and protect your money. 

If this doesn’t make sense to you, read this post 50 times if you have to. I’ve explained it to the best of my ability, but of course, questions are certainly welcomed. If your stuck on something or you need more clarification, please let me know. 

-FX Insights

August 4, 2008 at 8:41 am Leave a comment

Stops & Stop hunting

By FX Insights

Stops & Stop hunting

First and foremost, I will never tell a trader not to place physical stop loss orders into his trade station. This proceeding commentary is based on my own personal experiences, conversations with brokers, other traders, and with bank traders.

Stop hunting and stop loss triggering has been practiced by bucket shops, brokers, and bankers ever since there was a market to speculate in. If you refuse to accept this practice exists, you are a fool, and as it says in the book of Proverbs, “a fool is quickly parted from his money”. 

Your Broker is Not Your Friend:

If you trade on a retail FX platform, through a retail FX broker, you are instantly and always in a frontline combat situation… you’re in the infantry and the enemy is just a few paces to your front and your flank. The retail FX broker is just a bucket shop, a market maker, and you are their money maker. 

As soon as you place a trade with real money your broker is hunting you down, whether you put a stop loss order in or not. Your broker has likely taken the opposite side of your trade and will try to shake you out to close for a loss. 

Why do they take the opposite side of your trade? Your broker takes the opposite side of your trade because he has a 90% probability of winning the trade. Would you take a trade that carried a 90% probability of winning? Of course you would.

When you win a trade and close for a profit the money to pay you comes out of the broker’s netcap. The broker feeds his netcap by hunting stops, shaking out traders, causing margin calls, and triggering stop losses on extended market moves. 

With 90% of retail traders losing, it’s an easy game for the brokers to play. When a trader places a physical stop loss order into his trade station, he ups the odds of the broker winning. 

Stop loss Algorithms:

Retail FX brokers pay a lot of money to have geeks write elaborate algorithms to assist them in the process of hunting and triggering stops. Your broker can see your stop loss orders and the algorithms make it possible to group them. 

It’s very much like a firing squad situation. Retail traders set stops, mostly all in the same areas, the broker’s algorithms find them, group them all together, and take them out. It’s like the traders are lined up in front of a wall in a firing squad situation. 

If you’ve placed a stop loss order I’d be willing to stake every penny in my bank account that you’ve seen your stop get hit, to the pip, only to see the market turn right around and go the other way. Do you think it’s just a random coincidence that it happens every day in the market? If you do, you will be that fool that is quickly parted with his money. 

Broker Education:

Ever notice how the brokers are quick to offer free “education” to the retail FX trader? What they are offering is an education to teach you the quickest and easiest way to give them your money. Brokers don’t teach traders how to make money, they teach traders how lose money. 

The broker can’t feed his netcap if you are winning. When you show a pattern of winning, something else happens, but we’ll cover that in a minute… let’s stay on point here…

The retail FX broker will teach traders they must place 30 or 50 pip stop loss orders. That they must use trailing stops, that they must keep their stops tight, and must use stops to avoid drawdowns. In a liquid and volatile market, using 30 or 50 pip stop losses is the surest way to give the market your money. Using those tight stops makes it the easiest for brokers to manipulate the market enough to take out those stops. 

Stops and Tech Traders:

I’m not going to beat up tech traders here, I do enough of that during the week. But I want you to realize that the banks and brokers employ brilliant tech traders. I’m talking about people that are experts on all the major technical indicators retail traders blindly use and follow. They know where all the Fib lines should be, they can read the moving averages, stochastics, etc. 

The problem for the retail trader is that the vast majority of them use those major technical indicators as a guide to place stop losses. The retail trader will place stops 10, 20 or 30 pips from Fib lines, for example. The tech-heads at the banks and brokers know this, and capitalize on this. Those poor fools who are using tech indicators as a basis for placing stops are just like lambs being led to the slaughter. 

The other thing tech traders love to do is use round numbers. This really makes it easy for the brokers to take them out. Tech traders also like placing stops at 50 and 00 levels. My best advice for tech traders that feel the need to use stops is to use odd numbers, not even numbers, and to place them more out of the reach of where the brokers will typically go to take out stops. 

Broker Dossiers:

As I mentioned above, I wanted to cover what happens when you start showing a pattern of winning. There’s another algorithm that brokers have, and this one is for winners. If you show a pattern of winning, you raise a red flag with your broker and they begin studying and tracking your trading habits. 

You hear me constantly talking about patterns in this market… well, when you show a pattern of success, your broker has to find out why and how you’re beating the market. A winner is enemy #1 to a broker. A winner takes money from his netcap. Brokers don’t like paying winners, they like taking from losers. 

The more the broker can discover about your trading patterns, the easier it will be for them to find ways to either shake you out or stop you out. This could mean widening the spreads on you, slipping you on market orders, slipping you on take-profit orders, re-quoting, etc. If you’re winning and not using physical stop loss orders, they will go to great lengths to find where your weakness is and exploit it. 

There are a lot of traders in the FXI community winning. We can probably boast the highest winning percentages out of any trading community in existence… we are rarely on the wrong side of the market here and we all work hard to beat this market. It is for this reason we are watched by the banks and brokers, why they sit in our chat room, and why they monitor our forums. 

Stops and Price Action: 

I went to a military academy that was at times mentally and physically brutal, much like the Forex market. The challenges never ceased to exist and we were constantly being pushed and stretched beyond our limits. As I write this commentary, there’s something I can correlate from those days in military academy to something that happens in this market in regards to stops and price action. 

One night we were awoken sometime after midnight and given three minutes to be in formation with our gear. They put our entire unit on a bus and drove us to an area we’d never been. We filed off the bus, formed up again, and waited for orders. 

The sergeant instructed each squad in the unit to file behind the other, starting with Alpa Squad down to Echo Squad. The order from the sergeant was this: complete a 4-hour night hike in a swamp, without any light sources. This was mandatory. Then came the extra challenge – if we completed the night hike and then found our way back home before sunrise we could skip Saturday morning inspection and sleep in. 

This was a huge deal… being able to skip inspection and sleep in… it really didn’t get any better than that for us in those days. Basically, if we pushed ourselves a little further, we would be given a wonderful reward. 

I liken that story to how stop losses and price action work hand-in-hand. When I’m watching and trading based on real-time price action moves in the euro, and I see that we are getting close to an area where stops are placed, this gives me a tremendous amount of clarity and ups the probabilities of a trade. 

As like that story, when the banks and brokers push the market just a little further to trigger those stops, the rewards are tremendous. For example, lets suppose the euro has moved up 200 pips bottom to top and we’re getting close to an area stops are placed, what do you think the probability is of the market pushing another 10 or 20 pips further to attain a wonderful reward? The probability is almost off-the-charts high. It’s almost always going to happen. 

It is imperative you consider this: fundamentals are fudged and manipulated, technicals are lagging and unreliable — the only honesty this market will ever give you is through price action.

Stops or No Stops:

The main reason I do not place physical stop loss orders is because each trade I take is taken after a set of distinct criteria is met, even if it only takes me 30-seconds to see that a trade meets this criteria, it’s still totally thought out and executed based on a set of rules and guidelines. 

As a trader in the Forex market there’s exactly two things I seek and these two things are what keep me motivated to work so hard, to put in the time and energy, and to devote my life to this market for the time being:

1. Being right 
2. Being on the right side of the market

I do not like to be wrong and I do not like to be on the wrong side of the market. The brutality of this market allows for no margin of error. This market is too violent to allow for traders to take knee-jerk trades and to mismanage risk. This market is not for the emotionally and mentally weak and unstable. 

I hope you find this commentary clear and concise. That was my goal – to spell it out as simple as I can. If you have any specific questions on what you’ve read, please ask in this post. Thank you.

August 4, 2008 at 5:23 am Leave a comment

EUR/USD Weekly Outlook – – 8/3 thru 8/8 2008

By FX Insights

EUR/USD Weekly Outlook – – 8/3 thru 8/8 2008

For the most part you can basically forget about all the events that have occurred in the market the past two weeks because this week the circus comes to town… 

Arriving in the clown car is the FOMC with their interest rate decision and monetary policy statement while in the circus sideshow tent we have ringleader Mademoiselle Trichet running the ECB’s interest rate decision followed with a bonus freak show that’s not recommended for children, pregnant women, and those with heart conditions. 

This I do know – neither central bank is going to move on rates this week. This I do not know – how hawkish or how dovish the Fed and ECB intend to come across to the markets. Inflation in Europe is running over 200bps higher than the ECB’s target inflation rate. In June the Fed started talking tough on inflation as they finally realized they can no longer lie to the markets about the U.S. inflation issue. 

Political pressure forced the Fed to step up their hawkish rhetoric on inflation. In Europe the ECB is facing political pressure to tone their hawkish rhetoric on rates and to soothe the Eurozone with signs and signals of rate cuts to divert the coming economic recession and sharp downturn in growth. 

Both banks have painted themselves into a corner and both have few options. The Fed has exhausted it’s arsenal of dovish monetary policy. The ECB’s hands are tied behind their backs now and can no longer raise rates. Bernanke has been abundantly clear about one thing: his first objective is to bring about the smooth functioning of financial markets. Trichet has also been clear on his first mandate: ensuring price stability in the Eurozone. 

We’re coming to a crossroads where the Fed and ECB are going to have to change their top priorities. While the ECB was focused on inflation, they will now have to focus on growth, their financial markets, employment, and overall economic stability. As the financial markets do find stability, Bernanke will have to shift his focus on a future cycle of rate hikes to not only cool inflation but to bring down commodities and boost the value of the USD. 

Are we there yet? No, not exactly. It’s only August and it’s a bit early for this shift to begin to physically take place, but the time is drawing very near. That being said, we’ve already seen the underlying fundamentals of the market begin to shift in the second half of this year, just as we forecasted they would back in January. 

Now one of the main reasons the markets have been behaving wildly the past few weeks is mostly due to the complete lack of liquidity and heightened uncertainties. But, the other issue is simply due to the fact that the markets have not heard much from the Fed and ECB the past 30-days. 

The markets are like children. When children are neglected and have no authority figures to keep order in their lives, they are left up to their own devices and the results are often not pretty. This is exactly how it works in our market. The central bankers have neglected the markets and the markets have been left up to their whims and I believe this has a lot to do with the craziness we’ve seen in currencies, commodities, and equities the past few weeks. 

The markets need guidance from the central banks… they need to hear the rhetoric, they need to look for the signs and clues about future monetary policy… when this is lacking, the markets run wild… but, this should change as we get to hear from both the Fed and ECB this week, with each bank speaking on the number one key driver of the currency market: interest rates and interest rate policy. 

EUR/USD:

The euro’s had the crap kicked out of it after making its last all-time high at 1.6038. In my view I see the risk is clearly on the euro this week. Not only do we get a ton of Eurozone data, which could easily print unexpectedly to the downside, we have the unpredictable factor of Trichet and what he may tell the markets on Thursday. 

That being said, the dollar has seen some decent gains the past few weeks but if the FOMC fails to hit the markets with a hawkish stance on inflation, any dollar gains will likely be capped. The Fed is still printing money for the financial markets which tells me credit conditions are tight and not getting any better. 

Unemployment is at a 4-year high and we’ve had seven straight months of job losses in the economy. Housing has not bottomed and there’s no real bottom in sight as far as I can see. The equities market is a mess. So, how hawkish can the Fed possibly be when any significant amount of light has yet to be seen at the end of the tunnel? 

Another point to consider is this: since the FOMC meeting we’ve seen crude come down from a high at the $148 level to the mid to low $120’s. Gold has dropped significantly. The price of gas at the pump has dropped dramatically in many regions in the U.S. Here in Nashville at my local gas station the price for a gallon of gas has dropped 36 cents in the past two weeks. 

So, in my view it’s quite possible the FOMC looks at some of those bright spots with commodities which will diminish their need to manipulate the markets with strong hawkish rhetoric on inflation and keep singing the same tune about ensuring the orderly functioning of financial markets. 

My opinion is that the euro bleeding should come to an end at least until we hear what the Fed and ECB have to say. The 1.5500 level has held strong in the face of some serious profit-taking, euro selling, and abysmal fundamental data out of Europe. 

Should the euro sell-offs continue, there are a few overall downside levels I’m looking at according to my own numbers:

1.5504
1.5482
1.5464
1.5442
1.5418

The euro will likely continue to struggle to make any significant upside gains. As soon as we hit 1.5700 last week that price level was resoundingly rejected. In order to gain any traction and momentum to climb out of these low levels the market correlated variables will need to work hand-in-hand to give the euro a boost. This is imperative. 

Bear in mind the market is not even open yet, but I do have a few key upside levels you will want to be mindful of as we get started this week:

1.5588
1.5614
1.5632
1.5658
1.5684

I’m expecting liquidity to remain terribly low at least until Tuesday’s FOMC events. But keep in mind we have a ton of mega fundamental data on the books all week long in addition to the monetary policy events. 

As far as trading goes, I’m not about to make any big moves at this point. I have euro longs that are sitting in drawdown but I’m not overly concerned right now because there’s really no fundamental reason for another extended move down. I believe we do need to see some upside retracement, so I’ll be holding open all longs until market conditions and price action patterns dictate otherwise. 

Any move up we do get you can be sure I will take fresh shorts. As I’ve said many times, I will keep shorting every rise we get… I’ll short it all the way to 1.6400 if I have to, I don’t care. I’m shorting everything I can get my hands on. 

This could be quite a monumental week because the fundamentals and central bank monetary policy steps to the forefront. The fact that we’re still in the summer session diminishes the probability we break out of this range between 1.5900 and 1.5400, at least that’s my opinion. But once we get back to normal in September, it’s game on…

You know the drill – be smart with your trades, be smart with your open entries, and be a strict risk and money manager this week. Be smart about your entries and be wise with your entry sizes. This means taking 0.5% used margin entries and not allowing your usable margin to get below the 90% level at the most. 

If you’re new here or you’re a tech trader, this week will offer you many lessons on what really moves this market and why this market moves… the underlying fundamentals, moves within the market correlated variables, and most of all, all things interest rate related. 

See you in the chat…

-FX Insights

 

xls EURUSD Fundamentals 8-3-08 thru 8-8-08.xls 

August 4, 2008 at 4:38 am Leave a comment

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