ForexSpirit

This morning I was reminded of another way of looking at my drawdown. Specifically, my unrealised losses drawdown which is drawdown that is comprised of trades that are still open and currently under water.

If you are going to take trading seriously then it is best to approach it like a real business. Your trading plan is your business plan. You must put time and hard work into making your trading successful, just like you must put time and hard work into making any start-up business a success.

If we take the business analogy one step further you can equate that unrealised loss drawdown as your working capital. It is part of your trading capital that you have invested in your trading business from which you aim to generate a return.

Any time that I put on a trade there is no guarantee that it will be a winner. My trades are never going to move in the right direction 100% of the time. This means that some trades are going to be in the red for part of their lifespan. It also means that some trades are going to be in the red far deeper and far longer than I would really like them to be.

Using my grid as a framework to see how comfortable I am with the position of these trades in relation to recent price moments and using low leverage allows me to hold on to these trades for rather a long time if need be.

While these trades are being held (and using up some of my working capital) I have the opportunity to place new trades in a lower quadrant in the grid. I am thus able to buy at a better price, as long as my conviction in the long term trend holds.

When the main trend kicks back in the trades I have had to hold open under water all that time will come back into profit. I’ll be able to close them and my working capital will have been relinquished. I will hopefully have seen a profit as a result of all this activity.

I therefore do not look at unrealised loss drawdowns as an inherently bad thing. In fact they can be very beneficial as long as they do not get out of hand.

For my current goal of consistently generating 7 to 10% monthly returns my drawdown comfort zone goes up to around 25-30%.

The recent down move on AUD-USD this morning obviously breached that comfort zone which is why I had to resort to closing out a losing trade. If my gearing had been lower on these Aussie dollar trades then my drawdown would probably be still within my comfort zone at this time.

The high gearing of the currently open trades is related to the aggressiveness with which I moved my AUD-USD grid ten days ago. The weekend before last I decided to move up my grid on EUR-USD to 1.46-1.50. At the same time I also moved up my AUD-USD from 0.87-0.93 to 0.90-0.96.

If EUR-USD was going to make a push up to the 1.50 handle then I wanted to make the most of it by being decently leveraged on the way up. The bottom of this new grid was broken pretty much straight away on Monday the 12th, with price almost making its way down to 1.45, but it was quickly brought back up above 1.46 the following day and has remaining in the grid since then. Having this grid position in place has helped me to capitalise on the recent move up to around 1.4850.

When I moved the grid on AUD-USD up to 0.90-0.96 price had been above 0.90 for well over two weeks. Unfortunately I chose the worst moment to make that grid transition. If I had somehow managed to keep my previous grid of 0.87-0.93 then all the positions I hold now would be using greatly reduced leverage.

Hindsight is a wonderful thing but it doesn’t really help me out right now. Replaying how my drawdown would look if the grid had remained unchanged is an interesting exercise all the same.

With all that said and done I have decided to revert my grid back to 0.87-0.93 for the moment. If price does continue its downward slide then I’ll probably be considering if it shouldn’t be moved down another 300 pips to 0.84-0.90.

Before we get to that stage let’s see if the markets will put my current working capital to good use.

I think we might see a change in the tide of AUD-USD by the middle of next week when traders will start to consider the next Reserve Bank Of Australia interest rate statement to be released on December 5th. There is a pretty good chance that we could see the Australian interest rate hit 7%; even if it doesn’t the RBA will most likely have to stick to a hawkish tone.

The next Fed interest rate statement is on December 11. The markets are currently pricing in the strong possibility of another 25bps cut by the Fed, which is going to be all the more likely if the US equity markets continue to crumble.

If the RBA raises rates and the Fed cuts them then the interest rate differential on AUD-USD takes a leap and I think we’ll see the Aussie dollar back on the ascendency going into the end of the year.