Forex has become a huge focus of mine in the last few months, not least because when running the promotions business doing auckland dvd duplication and cd duplication, postering etc. it means we can work on client jobs and keep an eye on the action on the market and make our money.
Even when we’re just sitting here blogging getting google SEO juice happening for our influential blog posts, I’ve got one eye on what the forex market is doing.
I am actually thinking of going into business offering forex advice and funds. I had once thought of hiring someone to help me with forex, but I think I will have to give it more thought – I would probably be better of hiring a cleaner or something, just sorting out everything so I can focus more on trading, it’s quite bizarre to consider that as the thing grows, it’s probably more sensible for me to control the focus, the crazy thing about my system, or most forex systems I suppose is that the system itself doesn’t change, you just put more money in, and more money comes out. You scale the game.
It just seems extremely weird to think in a few years time I could be sitting here watching 6 figures working their way up, but the longer I’m in it, the more I am appreciating there is no reason to be concerned. It’s not as safe as a bank. But it’s probably safer than being under m
And with CMC markets they have guaranteed bank deposits in New Zealand – and you can get a sign up bonus to your account if you use me as your referral!
Email: email@example.com and I will give you some free advice too.
So the USD has gone extraordinarily high and using my strategy that left me caught carrying serious deficits on the other side knowing I’ve got EUR, CAD, AUD positions that won’t come back and be where they were last october for possibly YEARS.
I can’t help but feel happier when the USD peels back and I get my equity back, rather than peeling forward where I get my profits from my hedge but my equity dips.
When it finally peels right back, it will present some difficulty BUT I am away from the edges and therefore as long as I keep the hedge even, there’s no way I can lose equity.
What happens is that wherever you are, you keep the hedge even. That means only on the edge when you can take some pain do you start to ease the hedge off in anticipation of the bottom.
And so you get the top, like you are now, and you’ve got all that hedge stuck on one side going backwards, what do you do then? hedge all the way back the other way?
How do I slant that properly to get the result of higher profit yields and lowering the margin so I get that equity back?
Well once it’s clearly topped, it is heading down, you add greater amounts to the trend side, as it is already greater.
The side that is going up should be higher. But if you’re wrong, you take the profit and readjust the hedge. So when you’re stuck at the top and ready to go down, the uneven side should always be lower – provided it has topped.
But what if the trend continues? You have to buy up on the trend side, whether its at the bottom or not. When you get to the bottom of the trend, you have to sell up and match on the other side what you were unable to knock out before it became unprofitable.
But where it is in the range won’t affect this? I mean if it’s at the bottom of the range you can be more daring – depending on how big the range is and where you’re at with your margin level on that pair – are you prepared to increase your exposure?
You can also buy back rotten positions against the trend in order to lower your margin, but youre trying to pick a spot that is against the trend, carry trade unfriendly, but still close to the top of a trend.
So you need to propose some models here.
With USD EUR – we know which way the trend is pointing with USD pairs, and with EUR we can be fairly confident it doesn’t have the backbone, so I am really confident having my USD side exposure higher.
But with USD GBP I know the pound has much more fight long term, so even though I am have to watch the USD trend, I have to leave some room on the USD side for the reversal, so this is a 50% hedge now and when the euro drops further, and the AUD too, I will ease off.
There’s just no top in sight for the USD so no reason to start winding off the hedge bets for the EUR or AUD.
This is where the real discussion about hedging get started, especially the EURGBP and AUDUSD because I have evened out the hedge, I know the trend, but what happens when the trend breaks?
The Euro and AUD will fall, but the deeper the hedge you build, the sooner you get to a place where you’re overbought, and the further that side falls, the more it eats your equity, and our fear becomes that somehow, that balance tips so far out that your margins are threatened even on the inside.
It starts when suddenly I will have the euro rising and the USD dropping and those hedges will not be doing me any favours as they fall.
Right now I have $108k euro rising, and $114k of the pound, falling, what do I do? Well I can be confident of the pound getting up again, that’s why it’s slightly higher, and if it continue to unwind? Well we’re adding more to the EUR side as it rises, but we know it will fall, so we are easing off, because it will begin eating equity, and so the GBP positions must be more modest, until that counter trend breaks, the GBP starts rising and it’s already higher.
Like the AUDGBP, as the GBP come up and sells off, it meets the EUR hedge to hedge, which is falling back with modest positions, and the trend is on, as the GBP rises, we must keep the hedge even, or sometimes even greater, selling off on the reversals to avoid being stuck with equity eaters should there be a turnaround.
If there is a turnaround, then the big positions fall on the other side as you move that way gobbling up the small positions and replacing them with big ones.
Soon enough you get the parameters of the ranges, because there is a big position what wasn’t withdrawn on each side. Eventually there will be a breakout which leaves big positions stranded on one side.
But you also grab the profits. The fear is that the break out breaks past that point of profit to some other point which unerlines the point that when it goes up and down it’s good, when it stays going one direction it’s no good.
But the the further it goes back inside, eventually it must meet up with where the falls began, it just may mean I am carrying $200k hedged against each other there.
But by that stage not only is busting my account impossible, the moves made
But what if I really had no clue what the trend was? Well it works the same, within the range you have two break out points, when you break out, one big position becomes profitable, you begin to add to work to overbear the balance and ride the bias, but you must get out on the reversal. There, your sub range has grown wider, the two break out points more distant, it may reverse and return to set up yet another break out point, so much like my USDEUR, you have these multiple amounts stacking up and it’s getting hard to hedge on the other side against the trend.
Without the trend it’s hard to say whether whether you begin to wait on another reversal to earn your money back, but then youre no longer playing the hedging game.
But when you hedge, there must always be a valve so that the losses can ease of and allow the equity to emerge.
Then there is the AUDEUR and the USDGBP, we havent filled up the hedge meaning theres still room to slide back, put if the Euro starts bottoming or the USD starts topping, the hedges are there to roll on so we can take some profit to keep our equity up.
It seems like a tactical move to build equity securely, however slowly, then look to add proper biases back to what we’re doing otherwise the equity may just continue to go unrealised.
But again I see the increasingly bold tactic of building out. Soon my profit when it becomes my main source of revenue, will meet a natural point where equity becomes more important. Extra profits can be used for buy backs, or positions on the side we strategically want to reduce replaced by smaller sizes.
We spoke about putting together forex strategy presentation videos.
So what is my forex strategy heading into april 2015?
The AUD is still expected to fall long term, so the robust hedge I’ve got against the USD seems well measured. It still allows for some slip but we know it will never slip too far.
The GBP is expected to be tentatively growing stronger, but it’s also the one currency with the smallest range, while still having the biggest price difference which really made us have to take notice of the difference in value of the counter positions and hedges held there. The small range shows us they are the closest, so we can have some less risky fun, because we know we can favour the pound, which makes some big gains. If the pound drops we can get in behind the aussie side it won’t fall that far. If the pound rises, we can get in behind the trend, just try to avoid leaving bigger positions further down.
If the EUR is also falling however, and they are actually starting to be similarly placed, that pair becomes interesting. Knowing we are stuck in a range because the Euro is so weak but the AUD is also weak, encourages us to lean in where we are. The euro could go up, but never that far. The australian could go up, but never that far, so lean in.
This is a good candidate for buy backs when the euro is high because of the interest and the fact that the euro will not be soaring again for some time.
The AUD seems worth the risk because it can bounce back against the EUR and doesn’t have far to fall against the GBP, or even any more huge drops expected against the USD. A good place to test the ranges.
Will remain bullish, but the deep hedges we have created to capitalize on the gains hold us back when we are trying to gain on the drops. Long term, this is not an issue, but it is when we are trying to create the rise in equity that would signal our mastery. In the future such a thing may not be such an issue, but in the future we might not be so confident in the trend of the USD, where all conditions are favouring it’s support.
The pound is the only currency that has the strength to allow a sustained roll back, that is why we have created the most biased hedge there in the hope we can gain from the roll back.
EUR The Euro remains the opposite of the USD, but the USD being so overextended means our heavy bias towards the USD looks precarious should the roll back extend. We end up in no man’s land, which will force us to build our hedge, or simply have confidence and back our USD position knowing that if a full blown reversal happens we will be forced deeper into hedging.
Because of our hedging, we look to make gains on retracements rather than let the equity be released, so our strategy is to balance the hedges, or retain the bias towards the USD so when it cranks up, we buy up and ride the trend.
If we do end up wrong we can only hope we match up with the euro side sooner or later, so the hedges can be kept under control, but should we be forced into greater hedges, matching the USD as it rolls down with $20k+ positions, it is when it reverses back onto trend that we can make our equity back.
Yes, a single move of the USD back to above $1.15 seems unlikely but would start to hurt at some stage, what we can hope for is it would happen so slowly that we can build our equity, but the reality is once we have $200k hedges our profits must be increasing, if we’re sitting on $20k hedges, where we take more losses, we take more profit, and the growth of equity through profits stacking where losses remained balanced and equal starts taking us to a place where we can feel safer about the bias we have sitting on the hedges.
Then the question comes down to projecting income.
I think we’ve learnt if there is insane volitility and you get to ride down on a spike, you can make grands, and as I step up my exposure that will become more pronounced. There will be plenty of weeks I struggle to make $1k but I’ll have another week where I make $3k+ soon enough.
You can’t predict earnings based on volatility or exposure alone, but you know together, high volatility will multiply higher exposures.
Low exposure and high volatility couldn’t offer us enough in the past, but what about high exposure and low volatility? That will be the measure.
Well it appears when an event risk is coming up the market tenses like a spring and barely moves before blasting off, but when there’s little event risk you get solid flows moving back and forth which is good for me to make some money, but can easily lead to complacent habits when you forget big positions can get cut adrift once you break the range and become a headache.