Tuesday, May 09, 2006

Traders Helping Traders BIG WEEKEND EDITION - Part One

Traders Helping Traders BIG WEEKEND EDITION - Part One

Question:

Placing stops are a nightmare for me. I never know if I should take the profits and run or if I should have confidence that my trading plan will succeed and therefore trail my stops? I'm hoping you have some advice for me. Thanks.

Answer:

Taking profits vs. letting the market run...probably the biggest problem facing a new trader.

My rule of thumb has been to let your account size determine your strategy. If you're trading a small account (ie. anything less than $10K), forget about the home run trades, you can't afford to wait for them.

Consistently banking $500 - $1000 per contract per trade will do wonders for your confidence and your account. Sure you *might* miss the really big trade but by exiting at a target, but most times by exiting at a target price you will be maximizing your profits vs. letting the market retreat to stop you out. Besides, you always have the option of re-entering the market if you feel you have exited too early.

Exiting on a target will also improve your risk/reward potential per trade, which in turn will give you more opportunities to take advantage of what the market is giving.

Most new traders lack the experience (and the nerve) to trail stops correctly anyway; therefore using a profit target will usually work better for them.

If you have a larger account ($20K+), and you have gained some experience, then you can consider trailing your stops. At this point in your trading career you can afford to give a little something back if the market retreats and takes you out, as you look for the home run trades.

The safest place to trail a stop is behind proven support and resistance levels. If the market violates these there is a good chance you'll be looking at a change in trend so that's a good reason to get out. If the market is trending well, then you can trail a stop below the current low or use the 5 day moving average as a rough guide. Both will help you maximize your potential profit on the first sign of a reversal.

Got a question that needs answering like an itch you can't scratch? Send it along to me at [email protected] and I'll be happy to try and clear things up for you.

Currencies Market Overview

The Currency markets continued to be very cooperative last week. The beauty of trading the currencies is their trending ability. If you can get into a currency that is trending the profits seem to take care of themselves. This might be a touch over-simplistic, but the strong trends make stop management relatively simple, so you can usually amass reasonable profits before exiting the trade.

I'm a little disappointed that we missed Friday's move in the Yen. We did see it coming, and I considered buying the market; however holding a market like the Yen over the weekend makes me more than a little nervous. For every monster breakout, like the one on Friday, there will be at least two others that barely fill.

Ditto for the US Dollar. While the breakout wasn't as substantial as the Yen it is still an opportunity missed. I wanted to sell below current support; however Friday's breakout puts us on hold again. With a little luck we will see a reaction in both the Yen and USD on Monday which could give us another chance at both these markets.

Australian Dollar, British Pound and EuroFX

All three of our open currency trades can be handled in pretty much the same fashion. There's no trick to trailing a stop in these markets. The trend is strong so I simply trail the stop below the low of the last session. The idea is that if the market violates the recent support, as identified by the low, then we could be in for a larger retracement. And since the currencies are capable of very large, and expensive ranges, it makes sense to bail on the first sign of weakness.

Australian Dollar

The Aussie Dollar is just a few ticks short of our first profit target at 7747 and is also on an RSI testpoint. This means we could either see a break or bounce on Monday, but given that we are also trading off significant weekly resistance, I almost think that a bounce is more likely. Time to squeeze the trade between the resistance and support.

CONTINUATION of Long June Australian Dollar from 7481
Exit Order: 7677
Approximate Risk Exposure: $0 per contract
Profit Target: 7747
Approximate Potential Profit: $2660 per contract
RRR: n/a
Degree of Risk: Moderate



British Pound

The Pound is painting a similar picture; however the market isn't quite at the RSI test – yet. RSI is sloping lower, which could see rates follow; however we have a substantial amount of profit here so far, and if the market does reverse it will also give us another opportunity to re-enter the trade as well. What I'm trying to say is that you should take steps to protect as much profit as possible in case we see something lower on Monday. If the market does continue to rally, the next stop is long term resistance at 190.50.

CONTINUATION of Long June British Pound from 179.77
Exit Order: 184.90
Approximate Risk Exposure: $0 per contract
Profit Target: 190.45
Approximate Potential Profit: $6675 per contract
RRR: n/a
Degree of Risk: Moderate to HIGH



Euro FX

The EuroFX was a late comer as we only initiated this trade last week when rates broke through resistance at 127.50. In hindsight we didn't need to give the market nearly this much room; however this market can make incredible ranges, so I wanted to err on the side of caution. The only unfortunate thing is that the market didn't rally enough for us to do too much with our stops.

Certainly we have the option of bringing the trade to breakeven for Monday, and if the risk amount is of concern to you, then this is what you should do; however the better stop placement would be below Friday's low.

The market is in a strong trend and Friday's low roughly corresponds to the 5 day moving average. The downside to this scenario is that there is still over $500 at risk in the trade by doing this. While $500 is a lot of money, it is not a lot of money in a market like the EC; therefore you need to weigh the risk of losing $500 with the likelihood of getting stopped out too early in order to decide which course of action is best for you.

RSI is dipping a bit here as well, and the EC is likely to follow the Pound, if in fact the Pound does head lower and we are approaching long term resistance as well; however it is difficult to know whether this will hold the market back, given the current strength of the trend.

CONTINUATION of Long June EuroFX from 127.51
Exit Order: 127.09 (or breakeven)
Approximate Risk Exposure: $525 per contract
Profit Target: 130.45
Approximate Potential Profit: $3675 per contract
RRR: 7:1
Degree of Risk: Moderate to HIGH



Canadian Dollar

I think that more than a few traders were surprised to see the Canadian Dollar break the 90 cent market – I know I was – but seeing how the market stalled out afterward, it doesn't look like I was alone. The choppy trading that ensued was the market's way of stalling while traders rethink their positions. The good news for us is that this period of consolidation helps define the true support and resistance areas from us to trade off of.

Right now the upper limit of the market is Wednesday's high at 9069. Any long position I would consider would have to be entered above here. From the remainder of the week it looks as though the bulk of the resistance is really at the 9050 – 9060 regions; however I'd just feel better buying beyond the extreme.

Exit stops can go just under the 9050 resistance. The downside shows a little more activity at 9040, so let's put our stops under here. The profit target is pure speculation; however I would expect things to get rough for every 1 cent that the CD trades higher. This means we should expect resistance at 9100, 9200, and so on. "Eyeballing" a target looks like we could see something significant happen around 9250, so I'll make plans to exit just shy of here.

Mind you, RSI is at a testpoint, and given the overbought nature of the market, something lower is very likely. I wouldn't mind seeing the market post some lower numbers and maybe test the support at 8950, which roughly approximates trendline support as well.

BUY June Canadian Dollar at 9073
Exit Order: 9037
Approximate Risk Exposure: $360 per contract
Profit Target: 9237
Approximate Potential Profit: $1640 per contract
RRR: 4 1/2:1
Degree of Risk: Moderate to HIGH



Energies, Softs, Metals, Meats, Grains, Financials/Indices

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Homework Question:

A simple trendline is one of my favourite trading tools, yet while it is simple, many people use them incorrectly. Which of the following trendlines are correct?

Answer next weekend!

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