Money Management Flux
One of the recent changes to my trading plan was an update to my position sizing. In effect I doubled my gearing as compared to what I had been using. I use a different gearing size dependent on what quadrant of my trading grid price is currently in when the trade is opened. Doubling my gearing had the following impact:
- Q4: 1:1 -> 2:1
- Q3: 2:1 -> 4:1
- Q2: 3:1 -> 6:1
- Q1 4:1 -> 8:1
Another recent change to my trading plan has been the introduction of USD-JPY to my trading roster. It is currently unclear whether the carry trade is really dead and buried; it seems to be on life support at the moment, with a tug of war going on with carry trade believers testing the waters against those who think the carry trade is finished.
If I wait till this struggle is over I’ll potentially miss out on some significant strengthening of the Japanese Yen. My opinion is that the yen has enough legs to appreciate considerably over the next six to twelve months, even taking into account the indecisive Japanese economic data.
Doubling the number of currency pairs being traded while also doubling my gearing has been nagging at me lately; it seems to be taking on too much risk too quickly.
To that end I am going to be scaling back my gearing. I’m going to split the difference and set my gearing levels to:
- Q4: 1.5:1
- Q3: 3:1
- Q2: 4.5:1
- Q1: 6:1
Another recent addition to my trading strategy has been the introduction and usage of the Anti-Hedge trade (as termed by Jacko on Forex Factory). This tactic is nothing more than re-entering a trade at the point at which it had been stopped out. You cut your loss early but are unafraid to put that trade back on once price is moving back in the direction of the main trend.
I have thinking if it would be possible to make greater use of this approach. One of the main reasons for using low geared trades in the upper quadrants of my grid is to be able to hold those trades open if price goes against me. I have generally held those upper quadrant trades open up to 200 pips against me; trying to give them breathing room before taking my loss when price is far below the price I had originally entered at. What I need to do is to check my trade history and try to determine if holding those trades open for an extended period of time has been worth it. My gut feeling is that if price has generally gone more than 100 pips against me in the past then, in the majority of cases, I have had to close out those trades at the 200 pip marker.
Would I be better off just cutting those trades short earlier on? Employing the Anti-Hedge entry technique I will now always re-enter those trades once price comes back to the stop-loss price.
Using the Anti-Hedge method there will of course be times when my stop loss is hit and price then immediately surges back in the main trend direction. I will therefore have taken a loss without price having continued its correction.
In the instances when price does continue with its correction against the main trend then I will have cut my losses early and will have kept more of my trading capital intact for when the main trend does resume.
Another potential positive to not holding positions open against me so far into the red is that I could slightly increase the gearing of my Q3 and Q4 trades. Bread and butter trades in the upper half of the grid are currently nowhere near as profitable as those in the lower half, purely due to the much lower gearing of those entries.
Should I cut my Q3 and Q4 trades much earlier if they are going against me? Would it be advantageous to increase the gearing of my Q3 and Q4 trades knowing that tighter stops are in place and the use of the Anti-Hedge technique is going to get me back in?
These are the sorts of questions currently percolating in the back of my mind. I’m leaving it to my subconscious to sort through all the options. I’m sure that over the coming days and weeks I’ll decide which way to go.
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Comments
Comment from Colin McGinley
Time 10 September, 2007 at 10:32 am
There is nothing to stop you entering into other trades at lower price levels. The Anti-Hedge re-entry mechanism is purely a simple way to have your original trade picked back up again once the main trend seems to be resuming.
You would indeed be wise to take advantage of the fact that price is lower down in the grid.
The Anti-Hedge is just one way of limiting your losses on a trade that is going against you. You take your loss and wait for the correction to play itself out. If price continues to correct then you are presented with other opportunities to enter at lower levels. You might potentially avail of these. When the correction has found a bottom and begins its recovery you are able to get back into your original trade with an Anti-Hedge limit order.
I think the name itself offers some good clues as to what scenario it is trying to provide a solution to: that of hedging.
Another alternative to having a regular stop loss in place for any given trade is to place a hedged trade once your ’stop loss’ price is hit. A lot of people use hedging and are good at it. I find that it is worth more trouble than anything; you have to manage two open trades, you are managing both long and short positions which can be psychologically confusing, etc.
At the end of the day, with a hedged trade you are still market neutral, but now you’ve paid your broker the spread on two trades.
You would normally hold the hedged trade in place until price came back to the point at which you had opened the hedged position.
The Anti-Hedge entry is essentially mimicking the actual outcome of a regular hedged position. You cut your loss at the stop-loss point. You are market neutral as price continues to fall. Once price returns to the stop-loss point you re-enter the position and hopefully ride the main trend to at least recover your initial loss and into some profit.
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Comment from chainastole
Time 10 September, 2007 at 2:02 am
Hello, Colin.
The Anti-Hedge strategy seems misterious for me. What is the point of reentering the trade at the point where it was stopped except of psyhological effect? If you beleive the trend is still in place it would be more logical to reenter at more profitable levels - the levels below the stop point.
P.S. Colin, I designed the delayed correlation calculator, the original purpose of which was to find momentarilly arbitrage opportunities in delayed currency correlations. If you are interested I may send it to you. It would be interesting to receive a feedback from somebody as expereinced as you are.