Here Is A List Of Rules For Every Trade…
I have received several
email lately regarding my FX trading. While the vast majority
appreciate my insights in terms of the market analysis, many are asking, “Can
you offer a bit more education in the columns?” The answer is yes and no.
When I first started writing at TradingMarkets,
my focus at the time was short-term scalping of stocks (in fact I still do it
each morning since there are always opportunities in the opening hour). When I
wrote my columns each day it was pretty easy to give readers an indication as to
how I was trading each day. There was a clearly defined set of rules that
needed to met before a trade could even be considered, and they were all
technically based. Granted the final piece to the puzzle always boiled down to
tape reading, a skill which you simply had to learn by repitition.
Fast forward a few years and I now devote the
majority of my day to trading FX. I suppose there are several reasons this is
so, most obvious being the reduced volatility in the stock market. However, I
also decided to make some adjustments in my professional path. Regardless, FX
trading is a completely different endeavor than any other market I have traded,
I think that is part of its appeal. In my opinion, with the exception of very
sophisticated model based trading systems, there are very few absolute rule
based trades I have come across. In fact most, if not all of my trades are
approached slightly different each time. There lies the challenge in distilling
this information down to a static medium. However, by the time I finish this
article, I am confident that I will have framed my approach to FX trading so
that my daily columns will take on a whole new perspective for my readers.
While some die-hard technicians may disagree with
the following comments, my experience has taught me that it is challenging to
rely on TA solely in FX. The market is so large and for the most part
transparent, that macro analysis plays a huge role in trade selection. As
mentioned many times in this column, several of my trades that get off to a
rocky start are typically maintained because there is a pretty deep level of
conviction on what is actually occurring aside from the charts. Unlike
analyzing companies where accounting shenanigans can make it next to impossible
for the layperson to determine what a company is actually worth etc nearly
impossible. Analysis of an individual country is far more straightforward. The
most common analysis is rate differentials, what is a country paying in terms of
the prevailing rate of interest. A good example presently is the NZD/USD, there
is about 400 bp’s of added interest that an investor can pick up by simply
parking their money in the kiwi versus the greenback, this has a huge impact on
demand for the NZD/USD. Secondly, knowing that the economic vitality of New
Zealand is ties to the health of China and raw materials prices offers insights
as well.
While these observations are pretty obvious to
most traders, how can one package that into a rigid set of trade rules? It is
pretty tough. The good news is that like all trading approaches there is always
a percentage of the trade selection process that is very method driven. FX is
no different. Here is a list of basic rules I abide by on every trade,
regardless of the macro back-drop:
^next^
-Â Always trade in the direction of the trend.Â
For me, I use 60-minute, daily and weekly charts. While the trade does not have
to be confirmed on all three time frames, it has to be confirmed on the time
frame on which I am determining the entry price
-Â Make sure that stochastics are not overbought
when looking to go long, and oversold when looking to go short
-Â Use Fib levels to isolate entry and exit
points. I typically draw these in on swing highs and lows
-Â Use Fib extensions, wave counts, time analysis
to isolate target prices
-Â Inter-market correlations
Any trader that has been exposed to technical
analysis for three months or so should have a pretty solid grasp on these basic
technical tools.Â
The macro analysis is where it gets difficult to
boil down to a rigid set of rules. Economic statistics are always in flux,
comments from key officials alter market behavior, geo-political events change
correlations etc. While every trader has the ability to monitor these inputs,
it requires a tremendous amount of time as well as the sources to obtain this
type on information. However, just like any trading approach, if you locate web
sites and reports that provide these insights and you pour through them each and
every day, you will begin to see how the big picture starts to come together.Â
With this in mind, this is why I devote the large
percentage of my daily column to sharing with you what is making the market
tick. In the last week alone, we now have the Yen being the currency that seems
to be easiest to play due to its inverse correlation with oil prices. Last week
it was the return of the carry trade as Fed policy was seen to be clearly on
hold after the dismal jobs number, as of this evening, Fed policy is hawkish
again, this has put pressure on the GBP and AUD…all within a week.Â
Remember this, whatever market you trade, there
will never exist a pre-canned set of rules that allow a new trader to come in
and kick butt. This is the trap that thousands of new traders fall into. If
you look at the traders who are successful they all have one characteristic,
they are flexible and always making adjustments to their approach as market
conditions/inputs warrant and they rely on their experience and ability to
“sense” things because they have remained focused and become a specialist in
their chosen field. My goal with my FX column is to share with you what I do
each and every day in the FX market. Since many of you are new to FX, I thought
it would be helpful to offer some insights into what is possible in this column
each day, I trust that this was accomplished today.
In summary, look at my column each day not as a
rewind of what happened yesterday, or what may happen today, look at it as an
ongoing FX Seminar/On The Job Training. How many of you took the advice from
Wednesday’s column regarding the Yen? Oil prices continued to hit new highs
yesterday, the Yen suffered. Then in the early evening Japanese GDP came in
less that expected, the Yen fell more. This is information that is useful now.Â
As always, feel free to send me your comments and
questions.
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