WARNING! THIS IS HOW I CHOOSE TO TRADE, THIS DOESN’T MEAN IT’S SUITABLE FOR OTHERS
Hi, I was explaining on another thread how a few other pipsters and myself trade a particular pair, GbpNzd. Part of our strategy involves holding tight even if it moves several hundred pips against us, to which someone posted that we must have balls of steel, hence the title of this thread.
On the main thread where we post our thoughts and trades, we focus on GbpNzd, so I’m hoping we can use this thread to expand to cover other pairs that, from time to time, can be traded in the same way.
I’ll kick off with GbpNzd.
PipMeHappy brought this to our attention on his excellent threads and videos posted here. He noted that over several months this pair was averaging 300 pips movement a day. 600 pips is fairly common and occasionally 1000 or more in a single day. Clearly this offered opportunities to trade, but with such large swings there was the potential to wipe out your account if you got it wrong.
This pair is in a long, strong, upward trend. If you are willing to reduce the size of your lots substantially, you could sit out a several-hundred pip swing against you and wait for the trend to reassert itself, hopefully giving 100’s or 1000’s of pips in profit.
There are also opportunities for other trading styles here but, given the volatility of this pair, we feel trading longer term is more prudent.
For anyone wondering why reducing your trade size makes these pairs easier to trade…
If you usually trade, say EurUsd for ease if maths.
A standard lot trade (1.00) will earn or cost you $10.00 per pip movement, so if you only want to risk $50 you have to place your stop at 5 pips.
A 0.10 lot trade gives $1.00 per pip, so you can have 50 pips before you lose your $50
A 0.01 lot trade gives $0.10 per pip, so 500 pips before you lose $50
Using the smaller lots allows you to enter a trade and then sit back and relax, no need to constantly monitor your trade as you are unlikely to get stopped out in minutes. Once you’ve got used to the idea of allowing your trade to takes its own course, you can get on with the non-forex aspects of your life that you used to enjoy before forex took over.
Obviously, if the trade moves quickly in your favour, you can bring your Stop in to either reduce your risk further or to secure some of your profits. Depending how long you want to remain in the trade, you may want to keep the stop wide enough to allow for the wild swings commonplace in some of these pairs. Ultimately the choice is down to the individual, its very much a personal decision.
I calculated the volatility for the major pairs over the past 4 weeks. I will ignore the Danish Krone, Turkish Lira, and Ruble. The only pairs with high volatility that come close to GBP/NZD would be highly correlated. These are EUR/AUD, EUR/NZD, and GBP/AUD.
Considering its a bank holiday in the UK, a 300 pip rise today is fairly impressive.
GbpNzd has just slipped back a bit and taken out my TP. I’ll wait and see if it falls back below 2.4000 before deciding when to enter again.
If it stays above 2.4000 I’ll reassess the situation tomorrow
It all comes down to position size and defined entries and exits. I got long GBPAUD on April 30 at 1.94474 and I am still long with my stop currently at 2.08389 (just under the current 4 week low). My position size risked just 23 basis points of my trading capital from entry to stop even though my initial stop was just over 400 pips away from the entry. I now have 1391.50 pips locked in (3.4 times my initial risk).
Trade longer term and trade small. Then it really doesn’t take much balls. It just takes patience. So light up a fatty and chill homies.
Very nice trade Adrian. Im amazed more people dont trade like this, once you’ve got over the initial reaction to “S#1T, I’m 50 pips down” you can relax as the trend reaffirms itself and you can lock profit in.
Just seems such a no brainer
I like the look of this pair and if any more bad news comes out of China the Aud could come under pressure.
Price slipped from daily high to 2.1550, will see if it rises and holds over 2.1600 before deciding.
Keep you posted
Perhaps the most well known trading system is the “DJIA always long system”. A trader trading that system simply continues to pyramid into a bigger and bigger long position in a stock portfolio that mimics the DJIA component allocation. This pyramiding goes on regardless of price moves for or against the position. The theory of the system is that the components of the DJIA will profit long term and thus offer performance. The exit of the system is simply as late as the trader can stand to exit (some time before death). The advantage of this system is that it is just about the cheapest system to run in terms of fees. The main input is simply the patience of the trader.
The above quotation is very well known and encapsulates the sentiment in the hearts of the long-only equity holders.
It is possible that a shorter term system can get in and out of long and short positions within a broader move and thus outperform a longer term system that holds a position throughout the big move. A large number of traders have been able to beat the long term performance of the DJIA long only system doing just that.
The questions about selecting the term of any trading system include whether the longer term trader is capable of committing the time and effort necessary to run the shorter term system. With robots replacing traders, more traders can probably run the shorter term systems but there are still other matters of the fixed costs of trading fees/spreads and the discovery costs of losing trades. This becomes the real question in the end. There comes a point when further gains in resolution (trading shorter time frames) become unprofitable by virtue of the costs of fees and spreads and of decreases in win rates (increases in discovery costs). The limitations that prevent going shorter term to increase profitability increase exponentially as shorter and shorter time frames are considered. Thus traders face diminishing returns with advances toward shorter time frames.
One of the natural tendencies of traders and entrepreneurs in general is to underestimate future costs and overestimate future returns. For this reason, most traders tend to trade systems that focus on shorter terms than those that are the most profitable.
In a given period, a system of a certain length will outperform its expectation (have an unusually good streak) while others will underperform their expectation (have an unusually bad streak). Example: 1970 to 1980 was a particularly bad period for the DJIA long only system. But a shorter term system that would have gone short during that period would have done very well. This is why I like system as well as market diversification.
But it is true, that the bull that sits back and smokes a fatty stays high.
can I just say what an EXCELLENT post you have just written? It truly answers the question that I posed, adding a lot more depth to it (and a funky photo of Buffett, and of a ganja cow).
