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.







**You may contact me by e-mail at livinginbarbados[at]gmail[dot]com**

Saturday, December 22, 2007

Learning to love Canada again

Remember my post a few days ago saying that I would not be sent to the madhouse by the lunatic antics of the “loonie” (Canadian dollar)? Well, I put him back in his straight jacket good and proper. The more you trade the more you learn.

Well my lunatic friend helped me with its movement below parity with the US dollar, which was dramatic (see chart). I went back to the loonie as I sensed that it was indeed gaining its legs. I saw that after the US dollar rally of the past few weeks, the Canadian dollar was grinding around, almost aimlessly hovering around 1.003-1.008and then reversing toward parity with the US dollar with a certain regularity and each test lower was getting closer to the figure and the resistance less each time. So, I joined the sellers on Wednesday evening, at about US$ 1.003 to the Canadian dollar, hoping that it would fall initially to some 0.9980 and then 0.9940 and hopefully to 0.9920 before moving toward 0.9840.

The intial move worked very well and came around 6.30 on Thursday morning and my three lots netted me US$ 140, as the rate fell from 1.003 to around 0.9980. As I was due to travel for almost a whole day I decided to leave trading this pair alone. With travel completed on Thursday evening it was somewhat frustrating that the Internet connection was down at my in-laws. I was not able to review the market until Friday morning, by when I had missed the chance to get back in above 0.9975. When I was able to trade (on a somewhat slow and erratic connection) I managed to get in again when the rate was 0.9950, sold it again and made several one lot trades to net $20 several times, as the rate edged through 0.993. Better than expected Canadian economic data released today initially led to little market reaction then a reassessment suggested that future interest rate decreases would be less likely and the exchange rate continued its fall. Oil prices rose during the day, which also helped the Canadian dollar strengthen.

The rest of the day was a struggle with support around 0.992, which was stiff and is not completely broken, though the rebounds were contained to about 0.9933. Perhaps because the attack came at the end of the trading week and just ahead of the holidays, follow through was limited. For much of Friday afternoon the rate hovered between 0.9915-0.9933, and closed below 0.992, which should imply further downward movement. I hope that next week starts off well and my target rate of 0.9845 is reached. That would do nicely before Christmas.

In the market rate changes are not in straight lines, but often in waves. I have not studied wave theory but that could be something for private study soon; I will have to get academic and learn about “Elliott wave analysis”. After the initial major break below parity mentioned above the rate tried to get back up to parity and had I been smart I could have foreseen that and taken the bet on the increase. But I did not.

I have ridden waves several ways, including taking profit as an intermediate target is reached, letting the rate bounce back and getting in again. That risks missing the critical breakthrough so I tend to do it with caution, feeling that it's better to stay in at the initial position and maybe see such opportunities pass. With hindsight one can always review the wisdom. Hindsight is of course 20:20.

The other aspect that I am learning and will focus on more is a good lot size and even in a cautious trade the initial positions should always be two lots. That way one can opt to ride through waves by taking profit on one position and regaining the other position after a reverse movement; that works well if the subsequent retracement is dramatic and one could get in near the starting price.

I am still not sure if I can make a living out of trading but I have made $1000 in December. That is a return of about 40 percent, which is an impressive rate but I do not see that as sustainable; though I had targeted trying to make about 1-2 percent a day. Making $1000 a month would not be bad though.

Another lesson I have learned several times now is that online trading is very tricky when technology is not helping. Poor Internet connections or slow computers can lead to missed opportunities or at worst losses. For that reason alone setting stop-loss limits as soon as a trade is executed is really important, just in case the connection drops or computer freezes a and one is left totally exposed. I have tended to trade on two platforms simultaneously and found that this provides some protection as at least one platform tends to be running at any time. (It's sometimes astonishing to see the different speed with with each platform refreshes and if one is not paying attention, then deals can be opened or closed at the wrong rate.) But I am enjoying the challenge of trading “on the move”. Other people's computers are set up differently and I have had a devil of a time getting things set up as I would have them at home. Fortunately, all of that tweaking has not been too costly. But the essential element is the connection.

I plan to trade little over the Christmas period, hoping that the market also decides to take a break through the first week of January. It should be a time for friends and family so I will aim to respect that.

PS: I was heartened to read one of the analytical comments from Todd Gordon, Currency Strategist at Gain Capital (with whom I trade) in his “Strategy of the Day” for December 21, who analyzed averaging down, i.e. building positions when the price moves against you. I have used this technique several times to good effect, once really testing the nerves as with one of the recent repeated Canadian dollar 100+ point reversals against the US$ (see blog). Of course the practice can go sour as the rate moves further than some are prepared to risk as in the above example, or never really turns around, at which point you have to eat a large loss.

The technique worked nicely this week as I traded pound sterling/US dollar while the rate fell from 2.03 toward and then below 2, netting about $210 on two trades. He points out rightly that this technique must be part of a plan, within a correctly assessed strategy. Little by little my strategic sense is getting better; I know that the experts are not always right and twice recently when following their assessments, against my own judgement, I lost not so heavily but let's say unnecessarily. I wont pin blame on them for that, but it is important to remember that we are all fallible.

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