Nice.. it is true that if you trade like futures spreads in crude oil, you hedge out the dollar risk ...
Well, like I said earlier, the volatility in oil far exceeds to volatility in the dollar so in reality, over short periods of time there is no risk. Theoretically there is long term risk if oil exporting nations believe they are getting paid monopoly money for their natural resource. And no, futures spreads would not necessarily eliminate that risk but that risk is tiny compared to the other risks you are dealing with.
Hello Mav, Thank you for the posts today. Really outstanding. I've added them to my âMav the Manâ book. I have a question about the calculations of your monthly A levels that I donât think would impose on your proprietary material. Are you using ATR averages or daily high/low range averages as the basis of your A level calculations? I ask because Iâm hand drawing the monthly levels on a number of stocks (quarterlies and weeklies too) and Iâm changing the A levels between the two methods as I review past and forward action. As you know, with a big gap the ATR averages can change significantly but with the high/low range averages that does not happen. So, I have these discussions with myself over which one is most useful etc. Thank you sir.
If as you say your in a spread when buying a single crude contract... +CL/-USD. Then if you go long one spread -CLZ/+USD, +CLM/-USD. Then your USD cancels out and all you have is term structure and directional risk relative to CL only....that must isolate the dollar risk at least some
The key word is "some". Think of the dollar as a forward contract with a term structure. You are long the dollar in one term and short it in another. You are swapping one risk for another. That's how trading works.
ahh i see, its a term structure trade on the dollar in a very small way as well.. but right along with what your saying, the volatility in oil is way higher in a relative sense..
Alright, now for the newbies. There are a lot of new traders on ET and on this thread looking for the right way to get started. Most new traders seem to gravitate towards stocks. Usually penny stocks or low priced stocks. Some try to dabble in cheap options. Some make the HUGE mistake of trying to start out in futures. In my opinion, I think every new trader should start out in FX and probably the best place to start is with Oanda. But really any of them are fine. Oanda is good because you can trade any notional amount of currency. Why FX? For starters you get around that PDT rule for stocks. Futures are too big for newbies to start and options also fall under PDT. FX allows you to open a small account, with virtually no restrictions. Do NOT start out backtesting systems. You need to know how to trade and what to look for before you start designing something. What your first goal should be is to do what every young athlete starts doing when they are 7 years old. Practice hitting, throwing, catching, kicking, etc. You're going to place trades. You are going to get comfortable having risk on. Now obviously I think the ACD framework is perfect for a newbie but to be honest, how you trade in the beginning is not as important as much as you do trade. If you DO follow the ACD framework, start tracking the number lines. The number lines will give you practice looking at intra-day charts every day and scoring the price action. You'll be amazed at the feel you get scoring charts every day. Plot out your ACD levels. Use TIME stops not PRICE stops. You should be trading VERY small. Let the market breathe. It's going to go back and forth. No one is out to get you. There is no "they". Flow with the market, not against it. You should have an idea of what is strong and weak as I mention it all the time on here. Your first step should be the big picture. What do you want to do. Remember every FX pair is a spread trade. Which one do you want to be long and which one do you want to be short. Do NOT chase anything. Remember, FX prices move back and forth like a pendulum. You wait for it to come back around. Place bids below the market, place offers above the market. Have a core position you hold and practice trading around your core. As you track your number lines, you will see the transitions. You will see the money flow before your very eyes as it moves around the world. Just because I like one pair today does not mean I will like it tomorrow. The Yen might be THE currency to be short but your long might vary. It could be the GBP today or the EUR next week. There are many reasons I think new guys should start out in FX besides the structural ones. One, you will get use to the idea of spread trading. It's good to build an eye for market relationships. What causes what to move. Everything has value in relation to something else. Another reason is I think a big mistake newbies make is thinking they know something. Most of us are familiar with stocks. We mistakenly believe that we understand the Dow or the S&P because we watch CNBC or because you like AAPL products that you know the stock. It's better to trade something you are not as familiar with. It will keep you more objective. Also you will learn more about economics. Instead of watching earnings reports and upgrades and downgrades and stock rumors on twitter, you will start following interest rates, inflation, GDP growth, central banks and the bigger macro picture. This will help you immensely down the line even if you do decide to trade stocks, oil or corn. Understanding the big picture is VERY important. I am always shocked on ET how little most traders known about really anything. It's like they have a line on a chart or some moving averages and suddenly they are traders. That's all fine and dandy, but without understanding the bigger picture you will never be able to "anticipate" market transitions. You will never be in tune with market cycles. Volatility will always make you uncomfortable because you won't understand what's driving it. You will never have the patience to catch big moves because you won't understand what's driving the price action. Try to develop a thirst for knowledge. Almost all successful traders are driven by an ambition to know and understand more. Even with ACD, in order to understand price action you need to know what the action is. If some pair is reacting to some news event you need to understand what the market was expecting so you can determine if it's good news/bad action or bad action on good news. Do NOT marry yourself to one currency. Some guys like to only trade the Euro. Only trading the Euro will void everything I just previously mentioned. Remember, these are pair trades. There are two currencies to every pair. Why be long the EUR/USD if the USD is strong and the AUD is very weak? It makes absolutely no sense. As I mentioned in the previous post, ACD models currencies very well. You have your levels, you have your number lines and you have a trading plan. Let your number lines direct to the right pairs and let your A levels tell you where to lean on your entries and exits. Is it really that simple? Yes it is. But the key over time will be how fast are you spotting these relationships. How fast are you reacting to levels. How fast do you notice the transition from one currency to the next. How consistent you can be over time. Remember, whatever you think you know about the market, it's not enough. It will never be enough. You will ALWAYS have a knowledge deficit. You need to deal with that. You need to practice saying to yourself, you do NOT know what is going to happen. No one does. After you enter a trade, the market is going to communicate to you through your p&l. You need to listen to that. The market will probably be the only thing that doesn't lie to you in your life so you should respect that. And for the love of God, if you have any conspiracy theories running through your head, please dispose of them while you are trading. There is no "they". The broker is NOT going after your stop. There are no market makers pushing the market against you to get you out. FX does about 4 trillion a day. It doesn't need your $100. Remember the only thing you have control over is your own actions. Lastly, pay attention to the carry trades. Pay attention to interest rates. Interest rates drive money flows. Watch commodities. Watch world stock markets. In order to buy a country's stock or debt or resources, you need to own their currency. So pay attention to where the demand is. Try to learn over time what is driving Fed policy in that country. If rates are high, why are they high? If they are low, why are they low? Remember, you will pay to borrow high rate currencies and you will earn high rates when you own them. There is some carry in the world right now: India, South Africa, New Zealand and Australia. Watch those carry trades. They will clue you in on risk appetite around the world. And finally, regarding good FX books, there are many out there and I don't have time to make an exhaustive list. So I will mention two that I thought were very helpful. One is "Currency Trading and Intermarket Analysis" by Ashraf Laidi and the other is "Foreign Exchange; A Practical Guide to the FX Markets" by Tim Weithers at UBS. Good luck guys!
Holy shit - thank you thank you thank you! I got to about page 50 of this thread and thought I should jump to the end and see if it was still alive and there was still good info being produced. What a treasure trove
good stuff Mav, regarding currencies you may want to discuss the best time to trade them. I think the London open is very important. http://www.forexmarkethours.com/