ForexSpirit

I received an email last weekend from a fellow trader who wanted to know how I mentally handle the drawdown.

I think that it might be worthwhile if I share my reply, as it contains nuggets of useful advice which I hope to more fully expand on in future postings.

My reply, written on Monday this week, went like this:

I’m in a similar situation to you; I’ve been buying euro over the last few weeks as the dollar has regained its strength. I closed out two losing positions already, nullifying my profits for September and part of August. In turn, I have reduced my leverage for future buying in case it goes even lower, where I will buy bigger positions as it will be at the bottom of my grid.

I find that a few minutes of quiet meditating in the morning centers me against both the greed and fear urges I know lurk beneath the surface. It helps to make the drawdown bearable, reminding myself that for ever down there is an up.

Citigroup and Goldman Sachs see 1.2460 as a key level (from July 06 and back in 2004), and both are still long term bulls. Most other banks are too probably. The medium term is murkier.

My current plan is to exit my current open positions as soon as they come into a bit of profit (~30 pips) if the euro shows even a bit of strength. If it continues to decline I’ll stagger my exits on my other open entries. I staggered my entries at different prices and times, so I’ll do the same thing on my exits, even the losers. Not closing them all at the same time gives the market time to hopefully come around to my long term view.

Since this trading method focuses on the medium term, retracements against the long term can seem to take forever. I think that’s why it is so important to use low gearing, so that you are able to cope with it psychologically.

Any new longs I do open will be for quick profits too. The aim being to eat away at the recent loses, waiting for the irrationality of the dollars strength to ebb away. It’s beginning to test my patience though!

I think the only useful cash flow info you can use is the COT and open interest info from the futures markets and extrapolate that to the spot markets.