ForexSpirit

AUD-USD has yet to find a base during this recent carry trade unwind. As one of the highest of the high yielders the Aussie dollar is getting hit hard by the continued strengthening of the Japanese yen. The 0.8750 area is a potent support level which was penetrated during today’s London session. If it fails to hold then I think we could see further weakness down to the 0.8400 area during the rest of the week.

The Asian equity markets have been tumbling recently on worries that the US economic slowdown will have a major impact on their export business. There are some glimmers of hope for economies such as Japan which saw increased exports to other Asian countries in recent data but they seem to be overlooked for now.

Even with oil on its way back to $100 a barrel and gold pushing back above $800 don’t seem to be making any impact in providing Aussie dollar strength at this time.

Yesterday I had two AUD-USD entries which were closed out soon afterwards for a few pips profit, as I am very wary to not let any more trades that are in profit on this pair turn into losers.

With the break of the 0.8750 level my drawdown line in the sand has been breached. This means that my drawdown was approaching 50% and I certainly don’t want to let it get beyond that level. I closed out a Q1 trade that had been entered at 0.8985 for a 266 pip loss.

I don’t think there is much chance of an Aussie dollar recovery this week, especially in the run up to a contentious election taking place in the country this weekend. I am going to be especially wary of entering any new longs for the remainder of the week. I think I have been slightly too willy nilly in placing new longs on this pair and it has certainly cost me by reducing the flexibility of options that are available to me.

The long term fundamentals haven’t changed at all so I haven’t changed my one direction view on this currency pair. When the long-term trend resumes in the near future I will be able to recoup any losses I have to take in the mean time. This is something that I need to keep in mind so that I do not fret about having to take a loss now, no matter how large it is.

My short term goal is therefore to extract myself from my recent trades, for either a small profit or as small a loss as possible on any bounces back up that we might see towards 0.9000. If that bounce back up fails to materialise then I’ll have to exit those trades for a larger loss, but I’ll do it gradually. The aim being to just survive out this correction without my drawdown going beyond the line in the sand.

The big lesson learned from all of this was already touched upon in my last post but is worth repeating. My gearing on these AUD-USD trades is too high. I need to pare it back so that I am able to weather the greater volatility in this pair as compared to my primary currency pair, EUR-USD. I am thinking that I will use the very first gearing levels that I traded with on EUR-USD for the two pairs that I have recently added. That means using gearing levels of 3:1, 2:1, 1.5:1 and 1:1 for entries in quadrants 1 to 4.

I have trades on in EUR-USD and USD-JPY which are showing nice profits but my mind has to be in damage control mode until I am able to reduce my exposure in AUD-USD. This damage control mentality has me checking the charts far more frequently than I would like.

The trades in the red seem to become an oppressive fog that clouds all judgement. I can see how easy it could be to just turn a blind eye and walk away from the problem and not deal with it at all. It is stressful having those trades weighing on my mind all the time. I perform breathing exercises more frequently at the moment to help clear my mind and relieve some of that stress.

I have come through harsh drawdown periods before and know that this sort of time is the real crucible that forges you as a trader.

Even after the loss I have taken today I am still in positive territory with regards to my returns for the month so far. If I have to take another loss or two over the next couple of days then I will probably sink into negative returns. I would much rather post a negative monthly return and make it through this drawdown otherwise unscathed than hold onto the trades and see my trading capital wiped out through stubbornness.