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Dennis Jones is a Jamaican-born international economist, who has lived most of the time in the UK and USA, and latterly in Guinea, west Africa. He moved back to the Caribbean in 2007. This blog contains his observations on life on this small eastern Caribbean island, as well as views on life and issues on a broader landscape, especially the Caribbean and Africa.

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Friday, November 02, 2007

Learning to love the roller coaster: Another week as a forex trader

It is Friday afternoon and markets are closing in a few hours for the weekend, and am I glad. Having started on this gig (see blog) I have decided to go along for the ride. This week was due to be huge in terms of recent developments. The US dollar had been hammered merciless for a long time, but the past few weeks were horrible for the greenback, with all time lows or multi decade lows. The Chairman of the US Federal Reserve was due to make a statement on Wednesday afternoon about the decision on rates. The market viewed this as THE news of the week. I thought the week would be calm running up to Wednesday. Forget it! Tie on the straps.

Monday saw new highs against the greenback then a huge buying spree of the US dollar! And it went up and down and at the end of the day, it was hard to know which way the market would turn. I made a few trades and they mostly went bad. Tuesday I decided to just cool out. This is what I had planned to do this week anyway, but when you see and interesting development, well, you trade.

Wednesday, I had little time for trading and in fact I would be away from my platform most of the day. I regretted that as I wanted to witness the action even though I did not have a position open. The statement came around 2.30 pm EST and I got home about 2.40. In the minutes after the statement the market was in love with the decision and statement and many currencies were heading for 100 point shifts. Had I been in with the right position it could have been a cool $1000 in the blinking of a few eyelids. I had to try for catch up. I managed that little by little later in the day.

There is a certain character to the activity of the market, which I find attractive: it is up and down all the time for reasons that are clear and for no apparent reason at all. As a trained economist, it is incredible to witness the power of market forces moving prices, keeping prices unchanged as buyers and sellers tussle to determine the direction of the currency pairs, or sometimes making huge movements (30+ points) in one minute, and then reversing those movements sometime later with equal variation. I have accepted that one I set a stop-loss I can deal with how much I may lose; what I have to then manage is to manage my emotions if the deal is turning positive and especially if the price is rising well. I have learned not to close deals out prematurely, except with Euro/US dollar (which seems to have great difficulty moving past every barrier either up or down, so deals take an age to mature).

It is also important to start understand the rhythm of the market. There are times when the push to new highs or lows is at its strongest; in between there can be a lot of turbulence, even to the extent that huge dips or spikes can occur before the true position emerges at a higher or much lower point. The herd of dealers is pushing hardest at certain times and if a position is to be breached it's as if there is no breathing space and boom the door opens to a new higher or lower position. Then the market takes a breather. Then it pushes again. Once certain key barriers are broken then the market's progress can seem relentless. Seeing the developments on a day's graph is nothing like seeing the price tussle take place especially as you see you position run further into gains. These major pushes are also important in that they trigger responses especially in the form of preset reverse orders, which can make the price shift back sharply before proceeding on its way.

It is also important to sense the inter-relationships between markets. The progress or decline of the stock markets have a major influence on currency pairs, especially in recent times with what is referred to as "carry trade". This refers to buying of cheap currencies to facilitate investment in markets of strong currencies. [check] Stock market rises trigger buying of certain currencies and vice versa. Where a day trader like myself is at a disadvantage is in not seeing the developments in other markets in real time, therefore professional dealers have a major edge.

In the mayhem of prices shooting up and down I initiated one trade totally by mistake (as the deal window was adjacent to the currency pair I wanted) and to my shock and horror bought two lots of Euro/Japanese yen. What should I do with this lemon, I thought as the price started to plummet: I had kept away from things yen as the carry trade was causing havoc. But just in a blink the price turned and within half and hour the trade had gained 20 points. Thank you very much, I will cash that.

But watching a major push is something else, especially when the trend across the board is the same. Then it becomes like a race: which currency can set a new record first. The process is quite exhausting and after a few days of this the weekend is a real pleasure. I have been trading across the whole market, but I am paring back and may decide to just trade London and New York, if only to cut the hours.

I have lost a lot this week but I have also made a lot. This is first week where I have made over US$100 on deals. You have to take risks to get the rewards. That means dealing bigger lots. It also means sitting along the sometimes bumpy ride for a while. I had some large Euro/$ positions and bided out the time. I similarly had large Euro/Yen positions and did similarly. I also realised that, because I am not dealing with technical analysis beforehand the pull back can be deeper than expected. I have found the lower support levels and set a limit below them, which means a bigger potential loss, but just to protect the deal from early closing in all the turbulence. I also learned the hard way about booking profits too early and finding that a pull back closed the deal and so I missed the bigger rise to come. It is not easy to see (as I have done while writing this) a potential profit of $400 fizzle to some $90. But if "panic" says better take it, it is often the case that just after there is the break out and $400 is soon exceeded. This up and down can occur several times, and the "window" of movement could be 30+ points. It's tough on the nerves.

I do not have to go into individual deals. But I know that for professionals judgement and analysis reduce their risks. Amateurs like me have to rely a bit on luck. I have been trading for too short a time to feel some situations quickly. That is why I sometimes hesitate when there are quick movements, though it's also difficult to do all that is needed to not lose the gain, such as setting a new limit for closing the deal and making a bigger profit. That hesitation can lose a tidy $100 in a flash, and in that sense I have left a lot of money on the table. But, whatever. (In passing, I read on the http://www.onlinefxtrading.net/ blog how the guy there realised that he cannot make money with capital of only $250. Well, hello! When you have to put up between $35-100 for a "lot" ($10,000 of money to trade) that means you can maybe buy 1 or 2 lots unless you like risk and if that deal does well, then 1 times whatever is never much. I have found that you need to have around $2000 in the pot to have enough wiggle room to deal larger lots and lose and still be in the game.

I am smiling about what this process is doing. It could become difficult to not do it, but I will stop soon. It's easier when I have plenty of time. I am due to travel to Guinea in west Africa to work for few weeks, and if I do not have a sure internet connection I will not deal. I will also have other things to fill my time such as helping to deal with the issue of world poverty.

What I have discovered is that modern technology means that trading can be done 24 hours/5 days a week. One can trade in blocks and even trade in the morning at home, trade later at an airport, trade again later at a wireless hotspot, and so on. It's helped me move from having long lie-ins to getting up in the very early hours and staying up till late, unless I just close my account and say "No more!"

I'll keep you posted on developments, so to speak.

3 comments:

David Wozney said...

Re: “The US dollar had been hammered merciless for a long time, but the past few weeks were horrible for the greenback, with all time lows or multi decade lows.

A “Federal Reserve Note” is not a U.S.A. dollar. In 1973, Public Law 93-110 defined the U.S.A. dollar as having the value of 1/42.2222 fine troy ounces of gold.

Anonymous said...

I guess that Mr. Wozney wont mind if you continue to trade. The blog does not say you were trading US dollar notes. FX trading is about buying or selling the price of the currency. This kind of pedantry misses so much!

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