ForexSpirit

There certainly was a lot of indecision in the markets this week. This can easily be seen in the rangebound nature of most currency pairs from Wednesday onwards. Monday was the only real day with any defined trend and it followed the credit crunch script that had started to unfold on Friday: yen gained, the high yielding carry trade currencies continued to crumble and the US dollar became a short-term haven.

EUR-USD and AUD-USD saw moves south that were equivalent to 50% of the drops in July and August this year. There was a 500 pip drop in EUR-USD during the summer; this past week we just saw close to a 250 pip fall. AUD-USD tumbled 1200 pips during the first wave of the credit crunch. This time around it only got hit with a 600 pip drop.

Sterling came off slightly worse than the euro or Aussie dollar, with a 700 pip drop this week compared to a 1000 pip drop mid-summer. This can attributed to the slightly weakening fundamentals in the UK where housing issues are beginning to surface and the economy is coming off the boil.

I jumped the gun slightly last Sunday evening during the Asian session, loading up with euro and Aussie dollar positions. I should have waited for a more pronounced bounce on the dips. That bounce materialised on Tuesday and I added to my longs in both currency pairs.

The move was short lived. Things turned sour for sterling on Wednesday which ended up dragging down euro and the Aussie dollar with it. I closed out the trades I had opened earlier in the week as I did not want to see them go into the red.

There was another bounce Wednesday night in the Asian session so I put back on a position again. Again the bounce was very brief and Thursday saw price dipping down.

Friday saw a slight move up again, after the US saw poor TICS, Industrial Production and Capital Utilization data released. All in all, lots of ups and downs all week long without a clear direction present. The carry trade and US equities continued to be closely tied, with lots of ups and downs in those markets too.

There has been no emergence of a final burst to take the euro to 1.50 or Aussie dollar back on its journey to parity. With hedge funds and financial institutions coming to the close of their financial year at the end of the month of November I feel that there is still a good chance that we’ll either see the return of moves to those levels this coming week. The US housing permits and housing starts data on Tuesday will be key. If it points to continued weakness in the housing sector and there are no major bombshells from the big banks (or more bad news out of the UK) then it could be the catalyst to push euro higher.

If there is no sign of this up move by Wednesday then I’ll be looking to get out of any remaining long positions and wait to reassess the situation after the Thanksgiving break. I do remember that last year Thanksgiving Day saw a huge breakout of the 1.25-1.29 range that EUR-USD had been stuck in for several months; so just because US traders won’t be at their desks doesn’t mean that we won’t see any big moves over the holidays.

The most interesting part of the past week has not been the moves themselves but rather the fact that the moves down have dipped below the bottom of my grid while I’ve been holding open several trades. This has been the first time that I have experienced significant drawdown on my open trades since I have increased my gearing as well as started trading multiple currency pairs.

The main contributor to this drawdown has been the AUD-USD entry at 0.93 that I entered last week. I decided to keep this trade open rather than closing it for a 100 to 150 pip loss last Friday as long trades on AUD-USD earn positive rollover interest. I see nothing on the horizon to suggest that the Aussie dollar will not return to 0.93 and continue higher. The only potential fly in the ointment is the fact that the Aussie dollar is one of the main currencies linked to the carry trade so it gets hit hard every time there is a carry trade unwind. This will probably lead to continued volatility in AUD-USD such as we’ve seen this past week for the foreseeable future.

The highest unrealised drawdown loss that I saw this week fluctuated around the -30% mark. This is slightly larger than I would like to see. I have experienced similar sized drawdowns in the past. The beginning of this year springs to mind when my unrealised drawdown was at about -25%. I am generally comfortable holding on to trades during such a drawdown (although of course it’s never an ideal experience) as long as I can see strong fundamentals still in place for the direction my trades are in.

At the same time I want to limit their occurance and severity. I am continuing to evaluate the gearing I use on my trades now that I am trading multiple currency pairs which can increase the number of open trades that I’m holding at any one time. My current gearing across those multiple currency pairs has resulted in some astounding returns over the past few months, way beyond what I had originally been targeting. I’m wondering if returning to my original gearing levels while keeping the multiple currency pairs is the way to go. It would slightly reduce my gains but I should still be able to achieve my monthly target while also reducing my drawdowns during situations such as I’m experiencing right now. I would like to see such a gearing change result in something closer to a maximum drawdown of 20%. I know that larger drawdowns are always possible but it is certainly worthwhile to have a goal or acceptable level against which I can measure my performance.

I always knew that increasing my gearing would result in larger drawdowns; it was just a case of experiencing the drawdown to determine if it was something I could deal with. Having now gone through a 30% drawdown I know that it is something that I can handle given the right circumstances. During the past week I didn’t feel that I had quite the flexibility to deal with the level of drawdown given the gearing I was using for my entries. It is for this reason that I’d like to roll back on my entry gearing increase and just allow for my increased leverage to be handled through trading multiple pairs.

We could soon be coming to end of the main euro bullish trend that has been in place for several years now and this is another good reason to be scaling back on the gearing that I use trading EUR-USD. I think it will be well into the start of next year before the US dollar bulls really emerge but it’s something that I have to start thinking about now so that I don’t end up giving back too much of my gains during the reversal of the trend (which of course will only be openly apparent after the fact).

During the past week I’ve had to keep a very close eye on my positions as I did not want to let the unrealised drawdown get out of hand. If Monday’s low was broken I was prepared to start closing out some of my positions as I did not want to get sucked into another major correction comparable to the one seen in August.

Since I know that there is a chance of major moves in the later part of the week it will depend on how things unfold leading up to Tuesday’s US housing data that determines how I handle my current positions.

This journal entry has been more rambling than I would have liked. In reality I probably should have been posting my thoughts and feelings during the week as I was experiencing the drawdown unfold. I even thought during the week that I should be posting right then and there. In the end thought, I didn’t. The fact that I didn’t is a good clue that at some level I was not comfortable confronting the drawdown that I was experiencing. Therefore while I think I’m okay with what happened I’d rather not have to go through it if at all possible. This is another input into my shift in gearing once again.

Going forward I have to be aware of my aversion to posting in the heat of a drawdown. I feel that I would learn a lot from such journal entries so I will have to push myself to write in future during such times. If euro and Aussie dollar continue to correct in the coming week or two then obviously I’ll get my chance to do that almost immediately. On the other hand, if the long term trend resumes then I’ll have to keep in mind that I need to focus on posting more the next time I go through a difficult patch.

I often just post recaps of my weekly trading activities as when things are going according to plan there is not much to comment on beyond the trades that were placed and how the market conditions unfolded. It is only during the losing periods that things become more interesting, especially from a psychological perspective. It is the mental gymnastics that I experience holding trades during corrections that provides the clues to how I can improve myself as a trader going forward. When things are going well there is obviously not much incentive to change. It is how I handle the adversarial times and what I learn about myself from them that allows me to become a better trader. It is imperative that I learn from my mistakes. It is also equally important that I learn about myself and how I currently deal with unfavourable scenarios.

I have learnt of my continued aversion to journaling while handling a drawdown. Now I have to see if I can overcome it and allow my journaling to actual increase during such periods. Hopefully it will help me in my ongoing quest to be a better trader.