I really enjoy your course, it not only give me the knowledge, it give me much confidence. However, I am not sure if it is by chance that my last 2 trades are winner or I really happen to get some clues on orderflow trading, I would like to have your comment as to whether I am starting to get the right mindset on these two trade, along with a few question.
I want to short USDCAD on 15/3, since my target is 1.01, the RR is not ideal so I wait for a retracement and the price did come back and I
short at 1.0250.
The reason I short USDCAD is
1. china is diversifying is reserve away from aud into cad
2. Canada is going build its refinery which may earn enormous profit for the country
3. Canada’s economic data has been nice recently. .
4. CFTC report show speculator shorting CAD heavily but USDCAD refuse to go up, for which a squeeze may occur ?
( is my own thought)
5. Technicaly, USDCAD top is very heavy.
6. Timber price is very high which may benefit canada
7. After opening the position, cyprus crisis urge money flow out of europe which may benefit CAD.
The question for this trade is:
A: since many of the above points seem neglected by speculators nor on the orderflow generator list in your course, are they the reasons for a trade?
B: I decide to take profit at 1.0160 as the price refuse to go down after 3 days and there is a long weekend,
is it reasonable?
I long gbp/aud at 1.4515 target at 1.4615. the reason are
1 , Chinese is tightening its policy along with a plunge of china stock index which is negative to aud
2, In my opinion, the force of selling GBP has been exhausted/ bad economy condition has been fully priced in.
3, UK’s government change their attitude from letting pound falling to having it stablized.
The question is
I am very happy to take 100 pips profit in 24hours , but assuming there are no significant news come out for those pairs,
should I long again after it make some retracement for the same reasons above?
I like it that you are listing the key 1-7 reasons why you are taking a trade! That is a very good habit to get into, since most great trades can be broken down into the key 1-5 or 1-10 reasons. That is what trading is all about. Identifying the key reasons on any specific day or any specific week or any specific month, or any specific moment in time. Do identify the expectation shifts and scenarios that are going on.
I will offer you my perspective on your list of reasons. Bear in mind, this is just my perspective on what I believe is true and what I believe is important as to regard to the truth of the markets movements. Your may differ, and that is OK! Everyone goes on their own unique trading journey.
One of the reasons USD/CAD went down from the 1.0250 area from March 20th, was the higher risk appetite from the perceived Cyprus solution. From March 20 – 23, there were various pieces of news that gave the market hope that there would be a Cyprus solution. USD/CAD spiked up to 1.0280 on March 19/20, because of the risk aversion from Cyprus causing USD safe haven bid. So when that risk aversion subsided, then USD/CAD naturally came down.
Also, I would say that the big run up in Crude oil over the past few days has helped benefit the CAD, causing USD/CAD to go down from March 24 – 28.
Also the slide in the CAD crossed such as EUR/CAD and GBP/CAD over the past week due do weak EZ and UK growth, has helped USD/CAD grind lower.
The CAD CPI did come in higher than expectations on March 27, helping USD/CAD go down by another 20-40 pips or so.
Some general profit taking and short covering of bearish CAD positions. So going long USD/CAD would be a short CAD position, so short covering of long CAD positions, would result in USD/CAD going down. As you said the technical picture of USD/CAD was heavy.
So to summarize my list of reasons would be in no particular order:
- Cyprus perceived solution found, leading to removal of some risk aversion, letting the CAD appreciate in value as anyone shorting CAD betting on risk aversion has to reverse their trade
- Big rise in Crude oil price over the past week
- Slide in EUR/CAD and GBP/CAD helping to weigh on USD/CAD
- CAD CPI higher than expected
- General profit taking on USD/CAD
As you said the RR was not ideal. One of the reasons is because USD/CAD has usually been low beta over the past few weeks and months. Low beta, meaning that it is not responding vigorously to changes in risk appetite/aversion or general market conditions. So if there is a risk appetite or risk aversion day, USD/CAD struggles to move past 100 pips on the day. It usually only moves around 20-60 pips on the day. So therefore, the potential for a ODVE, or MDMM to form in USD/CAD is less, meaning that the finding a high Reward to risk ratio trade is more difficult. You can still find one, but you really have to nail the high/low of the day very closely and use tiny stops of 10-20 pips or so.
Therefore, USD/CAD is low beta. That doesn’t mean it can’t form a big ODVE or MDMM move. It can, but it just needs a sufficient macro catalyst. Such as big changes in US or CAD policy or economic growth or inflation.
USD/CAD struggles to go higher, because most people do not want to bet on the BoC going into more dovish mode, or the CAD economy contracting even more. Since if the US growth accelerates and improves, that should also help the CAD economy. So there is a lack of aggressive macro order flow to push USD/CAD too high. Similarly, very few people want to push USD/CAD aggressively lower, since the BoC in their last meeting downgraded growth, inflation and scaled back their language on the interest rate hike. If the CAD goes too strong, then that causes more export weakness in CAD, which can lower CAD growth, so the market is reluctant to push USD/CAD aggressively lower. Also as long as CAD growth stays low, and if US growth accelerates and the Fed prepares to reduce the size of QE, that should also mean the market is reluctant to push USD/CAD lower. USD/CAD employment numbers were very good, and inflation was higher for the previous months, but I am not sure if that will materially impact the Bank of Canada’s thinking.
So you have all these conflicting global macro scenarios playing out in USD/CAD, which is resulting in all the choppy action and lack of any big ODVE, MDMM, or GM movements. There have just been some intraday opportunities to fade some stop losses if you liked to take advantage of those.
As a general rule, playing a low beta currency pair or financial instrument is not going to make you the big money. It is just a general rule. Low beta stuff is usually boring as it stands a lower chance of exploding with volatility.
A lot about trading is about the current / near past volatility, compared with the near future volatility. You want to find a situation where the current/near past volatility is low or moderate, but where a situation will develop where the market is going to explode with volatility in the near future. If the volatility was low or moderate, and the market explodes with volatility in the near future, then the reward to risk ratio skyrockets higher because you can generally get in with a lower stop loss since the market shifted from a low vol state to a high vol state. That is what the three primary types of movements – the ODVE, MDMM and GM moves are meant to show.
This same principles of avoiding low beta trades applies to all markets.
Take the quote from Hedge Fund Market Wizards:
Buying low beta stocks is a common mistake investors make. Why would you ever want to own boring stocks? If the market goes down 40 percent for macro reasons, they’ll go down 20 percent. Wouldn’t you just rather own cash? And if the market goes up 50 percent, the boring stocks will go up only 10 percent. You have negatively asymmetric returns.
Therefore, in my opinion, in order to make money in the markets, you need to either capture beta or alpha, or both. Beta meaning a general market move based on shifts in global risk appetite / aversion. If you are going for beta, then try to go for medium or high beta plays where you can find a market in a low or moderate volatility state, where it will go into a higher volatility state, since that will mean your reward to risk ratio is very high.
Or you need to capture some alpha. Alpha can be low or high. For example if most of the other currency pairs were choppy, but USD/CAD was moving 100 pips a day for one whole week, that would be an “alpha play.” Meaning that it was one of the few that made a volatility movements, without regards to general market risk appetite/aversion. So if USD/CAD was moving 100-150 pips a day for a whole week, due to USD/CAD specific reasons, then I would deem that a “high alpha play.” Or if USD/CAD was moving say 60 pips a day for a whole week, without regards to general market risk appetite/aversion, then I would deem that a low alpha play. Since the market did move a decent amount, and did move due to mostly USD/CAD specific order flow generators, but it only generated a smaller amount of alpha, since the volatility was only around 60 pips a day.
But currently, USD/CAD has struggled to form any good beta or alpha moves. That doesn’t mean it can’t in the future. It just needs a proper macro situation to develop.
Therefore, in my opinion, things like China diversifying its reserve into CAD, the new refinery, timber prices, while they are all very nice and good fundamental backdrop, it can be difficult to pinpoint that in the price action. If all those things are generating bullish CAD order flow, then is that order flow scattered throughout the day/week/month? Or is it concentrated and can form some sort of volatility movement that you can identify? I prefer more identifiable, concentrated, massive order flow, rather than things that can be scattered or that I cannot pinpoint where it caused price to move.
The CFTC reports, I don’t pay attention to those. I never figured those out. They may be useful, but I haven’t figured them out, so I just focus on the expectations, news, scenarios, where the aggressive macro is going to come in, etc.
So taking profit at 1.0160 was very reasonable. Although you could of squeaked out a few more pips if you covered after stops below 1.0151 were triggered. But an exit based on your belief that the aggressive news/sent/fund/macro order flow is exhausted is a very reasonable exit.
As a general rule, the only time I want to hold a position over the weekend is if I expect a decent gap or something to occur. If you are using extremely high leverage, say 10x – 20x capital, then don’t hold anything over the weekend unless you are riding huge profits. If someone is using moderate leverage of 1-5x capital, then it is possible to hold a trade over the weekend if you expect something big to happen over the weekend or early Monday. Paul Tudor Jones shorted S&P futures the Friday before the 1987 crash. He held it over the weekend because he felt a big volatility move was coming. So when the market opened on Monday, the market gapped down big. So he knew he had to short on Friday or he would miss the big gap on Monday.
Top traders and big hedge funds almost always hold some or many positions over the weekend, they just allocate a small amount of capital and risk to their trades. For example, if they are holding a currency position, and it represents 5% of their equity, then they don’t have a problem holding it over the weekend, since even if the market moves 1%, they only suffer a 0.05% loss. Or if they are holding a stock that represents 1% of their equity, if the stock gaps 10% against them, then they lose 0.10% of their equity. So they hold positions over the weekend because they risk a small amount on them.
So with your USD/CAD position, unless you expected some huge move over the weekend to the downside, then taking profit was reasonable. Because, even if you regret taking profit, if Monday comes and you still really like the trade and want to short it again, and USD/CAD is around the same price, then you can still get in.
The general rule is that you can always get back into the move if you think it is worth it. Worth it – meaning the potential volatility characteristics and reward to risk and timing is right.
As to your long GBP/AUD, I would say the reason for GBP/AUD spiked was due to the exhaustion of GBP/AUD selling, so there was some short covering occurring. The AUD was rising a bit too much and due for some profit taking. Going long AUD at the highs, whether that means going long AUD/USD at the fresh highs, or shorting EUR/AUD or GBP/AUD at or near fresh lows, is a bad reward risk ratio trade in the current environment in my opinion. I tried shorting AUD/USD at 1.0500, but my limit was not filled.
So if you took 100 pips out of the move and are asking me if you should go long again, then you would have to ask yourself several questions. You need to know what scenario are you planning to occur. What scenario (s) are you betting on?
- Are you expecting further GBP/AUD short covering?
- Are you expecting the tightening of China to continue and cause weakness to AUD economy?
- Are you expecting the high AUD to hurt the AUD economy, and thus want to short AUD by going long GBP/AUD?
- Was the strong AUD jobs report just a temporary good report and the data would not be so good next time due to China tightening?
- Bank of England Mervyn King did say that the GBP was fully priced, but do you expect UK data to stabilize or improve? Do you expect them to QE past what is priced into the markets?
I hope I answered your questions!! Happy Holidays.