What will the Euro do this coming week? It doesn’t take much in the way of technical analysis to see that the pair is in an uptrend. Then there was the strong move up this past week—it started the week at 1.4295 and ended it at 1.4570 (the high for the week was 1.4635). Sentiment is bullish, judging by the news reports (see the word cloud from the last post). Even if you believe that this is a primary wave correction (Elliott wave speak), there’s little doubt, it seems, it could go higher, possibly up to 1.48 or so. But as I said in my last post it’s not moving right now. If you want to go long you’d have to wait for a reasonable entry point. So two questions:
1) If you were going to go long where is a reasonable entry point?
2) What do you do while you wait for it to get to that point? That’s the forbearance part I mentioned last time.
The first question is easy. Depending on your approach you can answer it a number of ways. I could use my 3 hour P&F chart I posted last time and hope for a retracement back to 1.4420/45. The pair closed Friday at 1.4570; its daily average true range (ATR) is 129. So that wouldn’t be such a stretch. Or I could use Fib levels, which would also bring me in at 1.4410/55. Finally, I could wait for something with more upside potential such as letting price come back to an uptrend line drawn from May which also coincides roughly with the 50 EMA on the daily chart. That would mean I’d enter around 1.4225/75. That would probably require waiting a few days at least. (Note that if I did take that approach, I’d want to carefully assess market conditions when it reached that point). Or I could wait for it to break out of some major resistance levels which would involve the highs in late 2008.
Why not just go long now if you think the Euro is bullish? Jessie Livermore answered it best when he wrote, “In a narrow market when prices are not getting anywhere to speak of but move within a narrow range, there is no sense trying to anticipate what the next big movement is going to be—up or down. The thing to do is to watch the market…and make up your mind that you will not take an interest until the price breaks through in either direction.” (Reminiscences of a Stock Operator, 1993)
Regardless of approach, what do you do while you’re waiting for your entry? If you think a market is going up you can fall into being fearful that you’ll lose out. This can make you jump in when the market is at a top. One answer is distraction. This can be as simple as putting on your headphones and listening to some music or doing the analysis on another pair. Or focus on how much you can lose if you’re wrong. Actually write down the numbers or plug them into Excel. Read them out loud to yourself. Traders often trade from the silence of their inner thoughts or with the babble of financial news in the background. Hearing your voice speak the results of an analysis, especially if it involves potential loss, can be effective in combating the urge to just put on a trade.
Relaxation anchoring is another technique. You do this by practicing progressive relaxation and then, when deeply relaxed, breathe in with the phrase, “I am relaxed,” and exhale with the phrase, “I am calm.” Each time you say the word “relaxed” squeeze your right thumb. If you practice this a few times it will only take squeezing your right thumb to bring on a more relaxed state during your normal activities. You can also anchor to a pleasant experience. I’ll include some audio links sometime in the future with both these approaches. Email me at dianne@feldyusa.com or post a comment with your email if you want to be on a list to receive them.
None of the above is a trade recommendation—in fact I’m short the Euro right now but that’s not a trade recommendation either.
© Dianne Fecteau, 2009. No part of this material may be reproduced in any form, or referred to in any other publication, without the express written permission of the author.
Showing posts with label trader. Show all posts
Showing posts with label trader. Show all posts
Sunday, September 13, 2009
Monday, September 7, 2009
Hedging
Sometimes traders, usually inexperienced or going through a period where fear is the prevailing emotion, decide to “hedge.” Using the case of the AUD/USD in my previous posting they might decide to take two trades—one long and one short in the same pair.
Is this a good idea? After all, if you have tight stops and it starts to run in one direction…
The answer is no.
First, this isn’t really hedging which has to do with exploiting inefficiencies across different markets. The kind of trader that would “hedge” this situation usually is one who has a few other walls to climb, e.g. they close out trades too quickly and don’t adhere to tight stops. You can’t make money this way. In fact, you can lose money.
Technical trading requires hard work; technical trading requires making an informed decision.
Gann wrote in How to Make Profits in Commodities, “Many traders have the idea…they can hedge and protect themselves. There is no greater mistake than this. It often turns out the trader loses on both trades. If you are in the market WRONG (Gann used the caps) and don’t know what to do, there is but one thing to do. Get out and wait until you know there is a definite trend….[Hedging] does not pay and you must avoid it.”
Gartley wrote, “The first and most important part of this analytical procedure is the accurate determination of existing supply and demand conditions.” (Profits in the Stock Market) This requires study and hard work. He also wrote, “the technical approach also appeals to many persons because the vast majority are inherently lazy….[but] the technical approach…demands constant study and the application of reasonable judgment.”
Back in July there was brouhaha over the new NFA rules regarding hedging. People wrote posts on forums saying they were going to open accounts with brokers outside the USA because they could no longer hedge. Many of the brokers played into this misunderstanding of the ruling.
FXCM, in its communication to its users on this rule, wrote, “forex traders will no longer have the ability to selectively place stop-loss or limit orders on individual trades, nor will traders be able to modify or close trades from the “Open Positions” window.”
This is not what the rule said. The rule said FIFO—first in; first out.. The first trade you open must be the trade you close first. If you go long and then try to “hedge” by opening a short position, you must close the first long position out before you can open the short position. It has nothing to do with not being able to place stops on any given trade. It has nothing to do with not being able to set profit targets on a given trade. It also doesn’t say you can’t have two trades in the same direction. (Scaling in? Let’s talk about that some other time). Of course you can also have two accounts where you have a long in one and a short in the other in the same pair.
NFA defines hedging as “where customers take long and short positions in the same currency pair in the same account.” The people at NFA think you don’t “understand either the lack of economic benefit or the financial costs involved.” They think you won’t be able to be profitable with this kind of approach. They also think it, “increases the customer’s financial costs in several ways.”
They have a point. When you buy long and sell short on the same pair you pay the spread twice. In addition, while one would think that the interest paid or received on the two opposite positions would offset, this doesn’t seem to be reality in many cases. In part this is because of the squirrely ways some brokers deal with interest.
It’s not my argument that government should be regulating traders to death. Hey, maybe if people want to throw their money away they should be allowed to do so. Regardless of how you feel about that, this rule actually addresses something that gives people the allusion they’re in control. God knows, many of us felt out of control when we first started trading. Some continue to feel that way—buffeted by an irrational market; stops being gunned by the big players; that some system or guru somewhere has the knowledge so desperately needed.
But I digress. The idea of hedging the same pair isn’t for the trader who wants to learn to be successful. To this kind of hedging I paraphrase George Carlin: “It’s BS folks and it’s bad for you.”
Is this a good idea? After all, if you have tight stops and it starts to run in one direction…
The answer is no.
First, this isn’t really hedging which has to do with exploiting inefficiencies across different markets. The kind of trader that would “hedge” this situation usually is one who has a few other walls to climb, e.g. they close out trades too quickly and don’t adhere to tight stops. You can’t make money this way. In fact, you can lose money.
Technical trading requires hard work; technical trading requires making an informed decision.
Gann wrote in How to Make Profits in Commodities, “Many traders have the idea…they can hedge and protect themselves. There is no greater mistake than this. It often turns out the trader loses on both trades. If you are in the market WRONG (Gann used the caps) and don’t know what to do, there is but one thing to do. Get out and wait until you know there is a definite trend….[Hedging] does not pay and you must avoid it.”
Gartley wrote, “The first and most important part of this analytical procedure is the accurate determination of existing supply and demand conditions.” (Profits in the Stock Market) This requires study and hard work. He also wrote, “the technical approach also appeals to many persons because the vast majority are inherently lazy….[but] the technical approach…demands constant study and the application of reasonable judgment.”
Back in July there was brouhaha over the new NFA rules regarding hedging. People wrote posts on forums saying they were going to open accounts with brokers outside the USA because they could no longer hedge. Many of the brokers played into this misunderstanding of the ruling.
FXCM, in its communication to its users on this rule, wrote, “forex traders will no longer have the ability to selectively place stop-loss or limit orders on individual trades, nor will traders be able to modify or close trades from the “Open Positions” window.”
This is not what the rule said. The rule said FIFO—first in; first out.. The first trade you open must be the trade you close first. If you go long and then try to “hedge” by opening a short position, you must close the first long position out before you can open the short position. It has nothing to do with not being able to place stops on any given trade. It has nothing to do with not being able to set profit targets on a given trade. It also doesn’t say you can’t have two trades in the same direction. (Scaling in? Let’s talk about that some other time). Of course you can also have two accounts where you have a long in one and a short in the other in the same pair.
NFA defines hedging as “where customers take long and short positions in the same currency pair in the same account.” The people at NFA think you don’t “understand either the lack of economic benefit or the financial costs involved.” They think you won’t be able to be profitable with this kind of approach. They also think it, “increases the customer’s financial costs in several ways.”
They have a point. When you buy long and sell short on the same pair you pay the spread twice. In addition, while one would think that the interest paid or received on the two opposite positions would offset, this doesn’t seem to be reality in many cases. In part this is because of the squirrely ways some brokers deal with interest.
It’s not my argument that government should be regulating traders to death. Hey, maybe if people want to throw their money away they should be allowed to do so. Regardless of how you feel about that, this rule actually addresses something that gives people the allusion they’re in control. God knows, many of us felt out of control when we first started trading. Some continue to feel that way—buffeted by an irrational market; stops being gunned by the big players; that some system or guru somewhere has the knowledge so desperately needed.
But I digress. The idea of hedging the same pair isn’t for the trader who wants to learn to be successful. To this kind of hedging I paraphrase George Carlin: “It’s BS folks and it’s bad for you.”
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