Thursday, December 20, 2007

Equity 523.10-- Forex Meltdown comes late in week

Hi everyone:

The huge moves in GBP/USD and GBP/JPY to the downside in the last few days brings up a good topic. Whether one, when trading a straddle-type trade such as FirstStrike or some other type of volatility breakout system; should continue buying and selling all breakouts from the beginning of the week until you get profits or the end of the week comes.

This week in GBP/USD, if you started at the beginning of the week and took the original sell, got stopped out for a 60 point loss, then the second sell for a 60 point loss, and the third sell, which also got stopped out for a 60 point loss-- if you continued and took the 4th sell you got rewarded for a move exceeding, at this moment- 268 pips. This seemingly absorbing the 180 points of loss that you would have accrued in the first 3 trades and adding 88 more. Of course, this isn't factoring in that each time you're having a loss, your account size is decreasing, meaning that each succeeding trade has just a little less position than the trade before. More on that in a minute.

The GBP/JPY pair also had a fantastic move down from the open of the week. But if one had continuously taken every FirstStrike straddle trade, the first sell and it's 60 point stopout, the next 2 losing buys, the next losing sell, the next two losing buys, and the next losing sell (seven consecutive losses in a row, totaling 420 pips)--- then you could have gotten to the winning sell at 227.81 which now is ahead 310 pips. Still down 110 pips for the week in GBP/JPY, despite its terrific performance the last couple of days.

A little more about factoring in a decreasing account size affecting your return when you do win.

If you had just been trading GBP/JPY by itself and were risking just 1% of your capital per trade you would be working from a capital level of 93.2% of what you had started the week with. If you were trading the GBP/USD pair too, the two earlier losses in the week would have further reduced your account to 91.3% of what it started with at the beginning of the week before getting to the last two winning trades.

After 3 losing trades, equity loss is very noticable. After additional losing trades from other markets you are trading, like 7 of them in the example above-- your position size may be very severely reduced even trading a small percentage of your trading account. (People trading 5% of their accounts per trade would go screaming out the door)

What this means is, that 268 pip potential profit from the last GBP/USD trade..., doesn't have as much return as a 245 pip trade would have had if it been the first trade.

And who knows if the markets won't rebound.

WARNING: I have traded FirstStrike through periods where I had 19 consecutive losses including the multiple pairs I was trading.

This week was just a good example of the actual dynamics of how volatility breakout methods can be very good but also very difficult for the human to trade.

In my personal trading this week, I did quite well. My best week in a month, actually. I caught the downside breakouts of the GBP/USD and GBP/JPY at 3:00 AM on the 19th. I didn't get the whole move with all of my contracts, but about 200 points on the pound/yen and 150 on the pound/dollar worked just fine.

As a side note, The discipline it takes for me to trade this account "straight up" according to the rules is incredible, since I do trade for a living and have to take dozens of additional trades every week to keep my funds working correctly.

After one knows many good methodologies to trade, trading for this challenge is like being at a smogasboard and only being allowed two things to eat and only eat twice a week. At least the two methods I chose for this blog are good ones.

Until tomorrow.

Joel Rensink

PS: To receive the FREE! trading rules for the Infiniteyield Forex Challenge ($499 value) and the semi-monthly newsletter about this challenge, send an email to: and tell me the address where you would like it sent.

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