Managing Winning Trades In FX

The three day weekend
for the US markets appeared to benefit the dollar
as it re-opened
late Monday to a nice pop to the upside.  Renewed beliefs that the deficits will
be addressed and contracting rate differentials appear to be the drivers. 
Technically, the 83.20 level has been breached, and the index now grapples with
83.50 and 83.69.  A New York close above 83.40 would be a very positive sign.

Daily charts highlight a clear break of the
down-trend since September 2004, although with many cross currents still in the
market, trend followers cannot sit back just yet and watch the dollar rise. 
Weekly models, while turning more bullish, will need to clear 84.50 in order to
call a trend break on that time frame.  Like Fed observing these days, the path
of the dollar, in the near-term, will be dictated by rhetoric and economic
data.  However, it is hard to argue that the dollar is beginning to look as
though a move higher in the next few weeks is at hand.

We have been fortunate to be on the right side of
the most recent dollar move higher as well as the one back in December 2004, the
difficult part is now managing the trades.  Unlike trading futures and stocks,
FX lends itself to longer time frames, the result is that riding the peaks and
valleys is a requirement; this can be tough for traders who have made the
transition to FX from a background where immediate gratification was the
standard.  While I will question the practicality of short-term trading FX using
very short-term models, say 5 and 15-minute charts, I realize that some traders
do operate on that time frame.

So how does one manage open positions and deal
with scenarios where the trade never goes in one direction, rather, moves in
your intended direction in stages?  The most obvious answer is you need to have
a high degree of conviction on your trade analysis, be it technical, macro or a
combination of both.  If your pre-defined stop loss is hit, so be it, you
managed your risk according to your plan.  However, taking profits off the table
too early is also a trap.  Predicting is inherently difficult, what you want to
see/read into a trade is often quite different from what might play out.  The FX
market, while volatile, typically will have a tendency to trend, albeit within a
wide channel or trading range which can prove challenging to traders with tight
stop losses.  Unlike a tech company whose fortunes can change by simply losing a
major client, countries and their currencies tend to change at a more labored
pace when viewed over the long-term.

Technical analysis plays a key role regardless of
the market you are trading, however, FX also lends itself well to macro analysis
in conjunction with your own technical observations.  Think of it as a
potentially tangible argument to be in a trade, rather than relying solely on a
line on a chart.  Like any market however, it is ones constant observation and
probing that unlocks the clues, rarely if ever does some “black box” system
perform with any consistency.

Open Trades:

Shorts:    AUD/USD, NZD/USD, NZD/JPY

As always, feel free to send me your comments and
questions.

Dave