|
|
|
|
|
 MARKET REPORTS |
|
Resident trader
Recent trades in forex and Aussie 200
Will Kraa, April 28, 2008
As mentioned in some of my previous articles, I have been doing some trading in Forex where the attraction is the enormous liquidity of the market and the tradeable trends that occur frequently. With the market being as volatile and directionless as it has been recently I have also been doing some day trading in the Australian Index, the S&P/ASX 200 or XJO. Today I will share with you two trades I have done over the last couple of days.
I used to concentrate mainly on the AUDUSD pair but as I also watched the GBPUSD and the EURUSD I noticed that over similar timeframes the moves in these pairs were greater than those in the AUDUSD. Percentage wise the moves in the AUDUSD may be similar to the others but what the trader aims for is the number of pips in a move. Comparing the EURUSD and the AUDUSD, a 1% move in the first represents about 160 pips while in the second it is about 95 pips. At the same time the cost of trading for each is the same (with my provider) at 2 pips for both.
When trading shares the return is on the value of the whole of the investment while with Forex only a small margin is required as an investment in the position. This investment (the margin) with some providers is further reduced by placing a stop and so the value at which the instrument trades is to a large extent irrelevant. So those pairs which trade at a higher value are likely to give a larger return. Therefore I now mostly trade the EURUSD and the GBPUSD. The first trade here is the GBPUSD.
On Monday evening this week as I was doing some work on one of my computers I was watching charts of the three pairs I usually trade on one of my other computers. I noticed that the GBPUSD chart was in a very steady uptrend with occasional pauses. The charts I normally use are 5-minute charts and just above the 19850 level the tails of the candles repeatedly found support at about 19854. As another strong upward candle formed I decided to go long 20 mini contracts ($200,000) at 19867 with a stop set at 19852. My risk was therefore 15 pips or US$300, which was well within the risk parameters for this account. As the chart shows the trade went well and after about half an hour was up more than 40 pips.
At that stage it was time to move my stop up to 19897 to lock in 30 pips or twice the initial risk. As you can see the next few candles were down and after about 15 minutes my stop was hit. I exited with a profit of US$600, twice the amount of initial risk. Soon after that the price took off again. If I had been willing to risk some of the profit I had targeted (by placing my stop just below the candle which took the trade above the profit target) my stop would not have been hit and there would have been a larger profit.
That is trading in hindsight but to me it was more important to ensure that the profit of at least twice the initial risk was locked in. It was unfortunate that the price briefly dropped below my stop but at least it was a good trade that produced a worthwhile profit.
The second trade was today (Tuesday) when I traded the unexpected rise in the ASX 200. I find this to be a very good alternative to Forex with no apparent lack of liquidity in the CFDs over the S&P ASX 200. At this stage I am trading the Australian 200 Cash A$5 Mini Contracts and orders are filled instantly and stops executed at the set price. The advantage of trading a single instrument like this is that you get used to the way it works and behaves making it easier to trade it profitably. I only trade it during the day while the ASX market is open.
After the ASX market closes it trades for a short time and then has a break before the evening and night session begins. This session goes on during the night and has another break, which finishes a few minutes before the market opens at 10 am. During that time it trades on the expectations of what the next day might bring and the spread (2 points during the day) widens considerably and can be more than 10 points at times. I find it much better to trade Forex during that time.
Since it is based on the movement of the ASX 200 it is not usually subject to the wild swings seen in the Forex market and (it seems to me) not so easily manipulated by those who want to collect other people’s stops. If you have not traded or watched it before, do not expect it to mirror the movements of the XJO exactly. It opens shortly before the market starts to trade and during that time can be very volatile. While the physical market is open it can trade a few points above or below the XJO depending on what traders expect the market to do.
This morning the expectation was for the market to trade flat seeing the US market was well down but at the same time not expected to drop too much seeing resource stocks were expected to do well. As the chart shows it dropped 30 points soon after it started trading and then as the ASX started to trade it began to rise just as quickly. At first the XJO was up just a few points and the Cash Contracts were actually trading well above where the physical market was. At that stage it was too volatile for my liking so I decided to wait for things to settle down and for some pattern to emerge.
As you can see on the chart below the price quickly rose to about 5590, retraced to around 5570 before it took off again to just over 5600. This resistance was tested a few times before there was another quick retracement to the previous support at 5570.
As a new candle started to form I quickly placed a trade for 5 contracts at 5571 with a stop at 5568. I was not able to place this stop in the market as it was too close to the entry so I kept a deal ticket open to close the trade at my stop if necessary. I watched the trade closely and as soon as the price had moved far enough I edited the trade to place my stop in the market at 5568.
When it got up to over 5596 the price stopped moving up decisively and retraced a few times (inside the candle so not visible on this chart). Seeing I had a good profit and it was getting closer to the previous resistance I decided to exit at 5596.5. As you can see the price did retrace a little but then moved up again and kept on rising for the rest of the day to be at 5650 when the ASX closed. If I had kept the trade open I could have collected three times the profit I locked in but that was something I had in no way expected. Seeing the ASX has for some time so slavishly followed the US market it was hardly to be expected that it would rise so far after the US drop.
As it was I risked just 3 points and got a profit of 25.5 points so that was a good result for a profit of $637.50 and no expenses (except the 2 point spread which is already in the numbers). Although my profit was 8.5 times my risk, which is very good, I did not consider it to be a really good trade.
I was willing to risk $350 per trade in this account and this divided by 3 would be $116 per point. I should therefore have opened the trade not for 5 contracts ($25 per point) but for 20 contracts ($100 per point), which would have yielded a profit of $2550. All I risked for the trade was 3 (points) x 5 (contracts) x $5 (per contract) = $75. Of course I did not have too much time to think about all this as I placed the trade and usually the risk in points is larger so 5 contracts is a normal size trade. This is not a case of being greedy, it is simply that the risk that is appropriate needs to be used to make trading truly effective. In this case that appropriate risk was $350 and to risk less leads to low returns. The larger returns of the most profitable trades are needed to make the whole process profitable by doing more than just making up for the necessary losses.
One way around this would have been to scale into the trade but then the risk of added trades would have been greater anyway so negating much of the advantage of the low risk trade. I have now discovered how to have multiple dealing tickets open at the same time – on the ‘advanced’ version of this platform this is possible so another solution would be to have multiple dealing tickets open with different sized trades ready. Then you would need to be extremely careful to make sure you clicked on the right one or the results could be very bad for your account!
I did in fact make this sort of mistake a couple of days ago. For Forex the trade size (mini contract) is $1 per pip but for the Aussie 200 mini it is $5 per point. As I typed in the particulars for an Aussie 200 trade I forgot about that (having just done some Forex trades) and typed in ‘25’ when I should have typed in ‘5’ which would have give me the $25 per point that I wanted. Instead it now was $125 per point and I soon realized the mistake as the trade started to go against me and the loss grew at an alarming rate. The temptation would of course be to hope that the trade would reverse and go my way so the loss would not be so large (or maybe even become a profit). But I have learned from previous trades that this is not a good option so I quickly exited. That little lapse cost me over $400 and then the price did in fact start to go my way after I exited. If I had not intervened I would have collected a large profit but I know my first job as a trader is to protect my capital so that is what I did.
The lesson from this is that you have to very quick and at the same time very accurate – in other words do lots of small trades as practice to make sure the process of executing and managing your trades is flawless.
That is why I would urge anyone starting out on this kind of trading to trade just one mini contract at a time. With Forex on this CFD platform one mini Forex contract is just $1 per pip. This means even a large mistake involving even say 50 pips will only cost you $50 and the cost of doing a trade is only $2 - $3 for the major currency pairs. It also means that the inevitable unprofitable trades will only cost a few dollars rather than hundreds or even thousands of dollars. This will make it much easier to execute stops and place trades since the amounts involved are quite small.
Looking back on my trading history I realize that placing trades has been one of my biggest problems as I am sure it is with most people. I have no problem taking the losses as they come and executing my stops. The problem is that I have avoided trades that I should have done since I knew that getting into the trade would place some of my money at risk. This tends to lead to looking for the ‘perfect’ trade where the risk seems minimal. There are no such ‘risk free’ trades and so it is possible to miss out on many trades that would have been very profitable. Doing these mini trades builds confidence and so long as this does not become overconfidence this will help in executing trades as they present.
To my mind that is one of the advantages of trading Forex – the ability to practise without risking large amounts of money and the fact that it is then possible to scale into larger trades gradually as you become more experienced. With shares (or even share CFDs) there is a minimum brokerage cost which makes doing very small trades impractical.
You should take into account the fact that this kind of trading is not suitable for everyone and I would also urge you to make sure you put into any CFD account no more money than you can afford to lose without too much trouble. Most of my money is in physical shares held by myself (at present a great deal of cash too) and I have no contracts, which in any way place the title to my shares in danger. I operate a number of small CFD accounts so no large amount of money is at risk of any one provider getting into trouble. Once an account builds up a fair lot of profit I take it out.
That is another advantage of CFD trading – the leverage means that accounts can be kept small and if necessary topped up from cash held elsewhere. (There are times when the leverage will be a tremendous help in keeping accounts small – have you noticed that? It’s like the easy way to make a small fortune – just start with a large fortune).
By the way, I mentioned the fact I had multiple computers for trading. I found that using just one computer led to problems when there were too many browser windows open at the same time. Also I needed more monitors to avoid having to switch between windows. I got online and looked for parts to build another computer just for trading. After some research I found I could buy the parts online from a local online store and for around $400 including Vista (basic) I built a good machine using good brand parts. I also found that the latest Celeron processors are very efficient using a minimal amount of power and do the job just fine. I also bought a couple of 17 inch good quality screens (not included in the $400) and am very happy with the result. It’s making my work a lot easier. People looking into my office find it hard to realize why I need five screens but I like it.
More articles from this edition of CompareShares:
Stocks: Bank stocks – buy or sell?
Forex: Ways to play the currency market
Forex Trading: Parity no certainty for retail FX traders
Analyst report - shares: Stock of the week
Resident trader: Recent trades in forex and Aussie 200
Stock Picks: Try before you buy, deconstructing Leighton Holdings
News: ABC Learning 'lost focus of local ops'
News: Chartwell director stays out of Geelong
News: Business confidence lowest since the tech wreck
Whatever your views, you can discuss this article - or any of Will's articles - on our message board Your 2 Cents.
|
|
