TalkFNStocks, Options and FOREX investments

I had a good exit from the AUD/USD FOREX play from yesterday. I did not exactly make the 50 pips, but was quite close. I got out of the FOREX trade at 0.9287 which gave me a gain of 39 pips. I had gone long on the AUD/USD FOREX trade at 0.9248 yesterday. I did not want to risk going into the 8:30 AM ET hour when all the numbers (durable goods, unemployment claims, etc.) were going to come in. In most cases I like to avoid playing the “announcements” market. It is very tricky and there are no well-defined rules that one can follow.

I am quite satisfied with this particular trade. It is not just because I ended with a gain. It is because I followed all the rules that I have set for myself. The first rule is to follow the trend. As they say, the “trend is your friend”. The second one is to clearly have a target which I had set at 0.93. (Note that the FOREX trade did touch the 0.93 mark and then retraced back — so technically I should have set a limit order at 0.93 to get the gain of 52 pips. But I am not that disciplined either). The third is to get out of the trade at the slightest movement away from the trend OR before any major announcements — which I followed.

So, kudos on being a well disciplined FOREX trader.

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Today I traded the EUR/JPY currency pair solely based on the technical charts. The details of the trade are:

07:06 AM ET: Bought EUR/JPY 133.04

10:57 AM ET: Sold EUR/JPY 133.30

That is a gain of 26 pips.

I am going to start documenting these short-term quick trades (Quick Pips as I call it) in the FOREX market on a regular basis as I do the actual trades. However, these will not be documented under tracking on a daily basis as that can really overload the tracking page. Instead, I will have a weekly summary of these trades posted there. 

So, why did I trade the EUR/JPY today? Primarily because I did not want to risk trading the US Dollar. Today there was the impending news on existing home sales and that number could have been anywhere. I was not prepared to risk taking sides. So, the safest bet is staying away from the dollar. I did expect the Japanese Yen to be weak today as, in general, I expected more risk appetite in the markets. Thus I selected the EUR/JPY. Also, since I expected the JPY to be weak, I decided to trade the EUR/JPY on the long side. 

I made 26 pips gain on the trade. However, the EUR/JPY had gone as high as 133.60 during the New York session. So, technically, I gave up on around 30 pips of additional gains that I may have been able to eke out. But that is not the point as I am willing to leave some on the table to manage my risk.

That is the statement from Ben Bernanke. What does he really mean? Probably only he knows. What is important is what does the market think. Everyone from Henry Blodget to the folks at Blogging Stocks thinks that statement is a poor attempt to say Mr. Bernanke is going to do nothing.

So, is it a good idea to stay with the bandwagon and make the plays that rely on the US Dollar going down? I am not sure. The dollar going down is kind of like a incorrect statement, according to me. Many people misinterpret dollar going down as something similar to saying the stock price of Bank of America going down. But it is not really the same. In fact, far from it. Bank of America stock can go down based upon its own reasons of non-performance or bad mistakes. The dollar, on the other hand, is always measured against another currency. As is all other currencies. So, when we say the dollar is going down, a more accurate statement is that the dollar is going down against the pound or the euro. However, if the other currencies are weaker than the dollar, then dollar value will actually rise against these other currencies.

So, a falling dollar may suddenly start rising against other currencies and take everyone by surprise. That is because the other currency pair that the dollar is being measured against is weaker than the dollar.

Scalping is when you get in and get out of a currency play quickly (usually within a few minutes to a few hours) taking advantage of a short-term trend in the currency pair. There are several articles on scalping  written by experts and the merits of the strategy have been discussed in several forms and shape over the years. Yet, I wonder, if there is a disciplined strategy developed around scalping by the busy person like you and I.

The key here is discipline and risk management (of course). Let us say that you have a day job and cannot devote your whole day to a scalping strategy. That means you only have a small window early morning or late evening for your strategy. We note the flexibility of the FOREX market that it is active 24 hours a day (except for a few minutes when the books are closed/opened between the 3 time zones of the market). That provides us the flexibility to indulge in scalping the FOREX market anytime between 6 pm in the evening to 8 am in the morning. Depending upon the lifestyle (family, friends, etc.) one may be able to eke out 3 hours every week day for scalping the FOREX market. That is where the discipline comes in.

One must only dedicate the chosen 3 hour-window for this activity. The moment one does not follow this discipline, the strategy can go wrong. Keep your heart out of the way. Get in and get out within this 3 hour window and try to make the most of it.

In addition, for risk management, I would always play with stops. That way, I limit my losses (hopefully none) and get out with the pre-determined acceptable loss. So, how can this strategy work out?

Let us say that you are following 2 currency pairs. You get in with your plays for both these pairs around the same time. You place stop orders to around 20 pips of loss that you will take on these trades. So, your maximum loss is going to be 40 pips if both the plays go wrong for you. The choice of your pairs is important here. I have seen that if your 2 pairs have a strong opposite co-relation, you have a better chance of making an overall gain. Why is that? Because while you may get stopped out on one of the pairs at 20 pips loss, on the other one you will end up making 40-50 pips because you have the opportunity to let your gain run. So, your net gain is 20-30 pips on the overall play. Does this always work? No, not really. But remember, your loss is never going to be over 40 pips and if you pick pairs with opposite correlation, you will almost always not make a loss. The worst case would be that both pairs stay more or less flat and you get out of the plays without any action. Your loss in this case is typically the spread of a few pips that you lost in your transactions.

I took two blows straight to my chin early this morning and I guess I deserved it. How many times have I told myself that for any news or event related play, I need to get in before the expectation and get out before the reality. I had some nice gains sitting there with each of my EUR (Euro) and GBP (British Pound) showing over 50 pips of gains each. I could have got out last night or even early morning today before the unemployment announcement at 8:30 AM ET.

Of course, everyone seems to have been wrong. The expectation was for unemployment to come in at around 10%, but the numbers came in much higher. Seems like companies have decided they are not participating in the recovery yet. I do not blame them. I think there is still a lot of productivity to be eked out from the current staff that companies have. The overall situation seems to be rational. Companies are cutting less but also hiring less. Prudence is the name of the game.

Ok, where did that leave me? I failed in my discipline test on one account but did pass on the other one. For both the plays, I had protective stops set at 42 pips below my buy in price. So, my loss was -42 pips on both. Of course, after I got stopped out, the EUR and GBP both gained some ground against the USD. So, my miseries were extended further as I would have been OK if I had not got stopped out. But I will not crib about that. I failed in my discipline test and got punished for it.

The market never fails to punish you.