Euro FX futures on CME monthly chart (February 2018 expiration ) show three buying months in succession (Dec., Jan., Feb.) but retreating from 1.25 and with gradually falling volume, making selling at this level attractive:
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Looks good. I don’t know much about trading Futures and their correlation with the likely move in the underlying currency. I think there are a few Futures traders on here that could weigh in on that.
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Hey I am just looking at the info for FXCM, they don’t appear to be an ECN broker, why did you decide to use them.
How do you mean? They are a No Dealing Desk, if that helps. Anyway, been with them
since 2012, never had any problems.
http://www.theoptionsguide.com/covered-put-writing.aspx
Thinking of doing this trade when the market opens. It is a variation of a Covered Put. the vertical line to the right is the expiry of the option, the green line is the option strike price, the red horizontal line is the SL for the forex trade.
I am guessing the option delta will be about 50% close to expiry -that means that for every £1 gain in the underlying currency position where will be a £0.5 gain in the option price, so that means I can sell twice as many option lots compared to my trade in the underlying so that there is parity between how much I lose on the option versus how much I am making from the currency trade.
Using the setup like this, writing this option into the market will give me roughly £3,750 upfront, which is about half my risk on the currency trade if market goes up and stops be out at the SL. In that case I would lose -£7,500 (5% account balance) + £3,750. The only risk there is that after having closed my out on the currency trade, the market will then go on to move down and below 105 and make the option that I wrote in the money so I am losing on that also, to counter that the EA opens a limit order at 105 (strike price for option) for exactly the same lot size if my currency positions closes out at the SL before the expiry of the option.
The only way I can lose in that case is if the currency trade loses then the market moved down to make the option in the money at which time I have got in on another currency trade to counter that risk, but then the market moves up again after the second currency short has opened to lose more money on that still.
A lot of acrobatics I think probably not. But would have to find a way to work out the probability values for that event.
I think the most likely outcomes will be
- get the trade wrong so end up losing £3,750 (2.5% of account balance)
2)get the trade right in which case my PnL is capped at £17,700 on the trade + £3,750 from the option.
R:R 4000:20000 1:5 Rounded up.
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Payout here is equal to the risk within my SL so if the trade loses I lose nothing. But my upside is capped at £2,500 (PnL) + £7,500 (Premium paid to me) but the real risk is that I lose the currency trade then the market comes down to put the option in the money so I have to get in on another currency short trade to hedge the downside risk - then the market moves up again so my second currency trade loses money again.
I think that is unlikely, but I haven’t figured out how to quantify the odds yet.
Trend trading H1 on USDJPY seems pretty reliable at the moment. The Indicator on this chart (Green) looks at the change in the moving average from one period to another (it is smoothed 4 bars) so the idea is that when the line crosses zero the direction of the trend is changing as there is a turning point of the SMA (SMA 50 in this case).
If you look at the vertical line for the last 3 crosses, there does appear to be predictable trend trading opportunities with this pair.
Dear Ropunzel,
thank you for this! I am not sure I quite understand it, but that is mainly because I have not had time to really read it and on a big enough screen to see your charts properly…
Anyway, how is this system working for you?
Oh which one. I am testing 2 at the moment. I am looking at the Carry - still not enough results. and trading with options. I am learning a great deal more about how they work and how to combine them with trade in the underlying currency pair. Starting with Covered Calls and Covered Puts.
So far seems okay, unfortunately I don’t have any potential trades to demonstrate with. I am looking for a new options broker to buy and sell on the central exchange.
Does does appear to be an edge from trading this way, the main way that is introduced from what I gather so far is that the risk rewards for the trade change to more favourable ones; a 1:1 becomes a 1:2 etc…whereas the probability of wining or losing stays essentially the same as simply trading the spot.
2 things to consider would be
- Limited upside potential
- the event that the market does a whipsaw.
If sell get in short on the spot fx and sell a put option lower down, you are paid a premium. If the market goes down then great, you profit from the market movement in the spot (upto the strike price of the option) and also benefit from the premium. That could be say £5k for the spot move and £1.5k for the premium = £6.5k.
If on the other hand the spot trade is wrong and market hits your stop loss on the spot trade, then you would lose -£5k + £1.5k = -£3.5k. But probability of doing either assuming a random market and no edge is 50:50. The assumption in this case is that the market moves against you an does not recover before the expiry of the option - so that the option expires out of the money and has no value for whomever bought it.
If however - the market moves up to knock out your spot trade, then moves back down again to bring the option into the money - then problems. You are now losing money on the option with no reciprocal profit on the spot, the only way u can counter that is to get in on another short position on the spot, so that you are losing money on the option but making the same (usually making more depending on the option delta) on the spot. It is the risk of that eventuality that you really need to consider to determine if there is sustainable edge in the trade or not, in the first 2 cases there is clearly edge.
Maybe there is a way to do it with a random walk between two barriers in the given time period.
for the Covered Put with expiry on 02/03/2018 looking at the H1 handle, there are specific number of steps (hours) between now an expiry.
So you want to work out 3 probabilities:
- that the market moves to your stop loss and beyond in the number of steps
- that the market moves to your take profit and beyond in the number of steps
- most importantly - that market moves to your stop loss then back to the strike price of the option in the number of steps
- any other case is not relevant.
You would need to have a probability value for a move up or a move down on each step - assuming random behaviour we can make that 0.5. You would then need an average (unit) value for each move up or down - you can probably estimate that with the ATR.
First you would need to know if the ATR based estimate of each move is accurate and the error. I am sure you would be able to test the predicted probability of those events versus the reality to see if the model carries any weight or is a complete nonsense.
Wow I am just reading through some material on presenting technical ideas in plain English and looking at few of my posts, I think I am going to fail that paper.
haha yes, I am afraid I did not understand much of what you have written hitherto!
I am trained in music, after all, not finance 
Wow that is interesting, what kind of music.
Interesting. i should read more of these introductions. I want to learn to play the Guitar and I was wondering if you could signpost me to the right tools, literature or otherwise as well as the best introductory piece of equipment.
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Hello Ropunzel,
is it classical, acoustic or electric guitar?
Try a free trial of Yousician for starters…
Tons of online videos too but you have to
know what you are looking for, so maybe this
may help:
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Acoustic…
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