I am interested in how some of you are determining how large of trades to hold long-term with respect to your capital. I can see how it makes sense to hold trades long-term due to how strong and long-lasting the trends are, but it still seems a bit scary to have those sudden large ups and downs. How do you deal with this? When to enter/exit? How many contracts to trade with respect to capital? How large a stop to use? How do you know how much risk to take so you can sleep?
This is all extraordinarily relevant to the time frame in which each is trading. Trading the 30M chart versus the daily will result in vastly different opinions. Can you be more specific in terms of which time frame you're talking about? I'd say that personal MM has alot to do with what kind of a position a person holds. For instance, I'm perfectly comfortable buying into a falling market when my opinion is that the market is just skidding southward. Liz
There's always a "point of no return" in a strong trend. Assuming you identify the right support/resistance zone in conjunction with the trend direction, you won't have to sit through too much heartache of ups and downs. In stocks, this principle works well for me. I cut losses very fast and minimize heartache. With FX, it generally works; however, I find that I do deal with a bit more up and down on the initial entry because it's a more decentralized marketplace. But you can factor in that "entry noise" by glancing at just how volatile the currency is around where you're entering. There's no guarantee, but the piece of the move you want to capture should be much larger than the worst of the "noise" you have to endure. So, for example, if I'm looking at daily charts looking to capture hundreds of pips, I'll limit my risk on the 1m/5m charts to roughly the size of the peaks/valleys that form around the micro-term support and resistance zones. If I'm wrong, I get out. If it turns out I was right, I re-enter. The "hundreds of pips" moves make up for the lost "commissions." It's always about proper entry, where a proper entry is the one that is defined as the one that causes the least stomach-churning. This is my style, but I find it lets me sleep better at night. Shoddy explanation, but I'll explain in more detail if I did a crappy job the first time.
My stops are based on the trade, not risk management. For me they are the point at which the market tells me it's not going to do what I thought. That gives me a risk figure which I then apply to the exposure I'm willing to take on the trade to determine size. This generally means wider stops for a long-term position. I also, however, am willing to take on a larger exposure in that timeframe because I'm not trading as frequently. By that I mean I might be willing to risk 10% on a trade knowing that I'm only going to make a handful of those trades a year. That's opposed to swing trading where I wouldn't risk anywhere near that much because my trade frequency is a lot higher.
I use a fixed ratio MM method for managing my trades, so the bet-sizing aspect is no more than my risk parameters will permit at any particular time. Typically, my exposure does not exceed 2% but I have increased to as much as 5% on strong moves and have held trades as long as 18 days. The sudden ups and downs shouldn't really be that disquieting if you have studied the behavior of your instrument. Currency pairs have statistically consistent max excursions, barring the odd financial or political surprise (outliers)...some pairs are more volatile than others. Knowing your particular instrument's charactristics will aid you in managing the ups and downs -- both in price and in your emotions. Scaling your positions and risk around these characteristics takes the nerve out of most trades if you have a solid plan and statistical edge. Having said the above, you have to find a strategy and method that work for you when you put everything together. How much risk capital you can begin with and not be nervous about losing, how flexible your broker allows you to be with position sizing (the more flexible the better), the time frames you trade in and the instruments you trade...it all depends. I'm assuming you are just starting out -- and you're starting out well by asking these questions first rather than what people usually ask, which usually centers around how they can find a trading model that will be right most of the time so they can bet the farm on every trade and turn $1K into $10M in two years. But don't take my word for it. You can answer all of your questions by reading the following: (1) Trade Your Way to Financial Freedom -- Van Tharpe (2) The Trading Game -- Jones (3) The Master Swing Trader -- Farley There are of course many other fine books, but I'm assuming you've been donig the required reading anyway. You'll find something in each that you can take with you. Note that each has their flaws. I think Farley's book is by far the best all-around, so don't read this one last unless you are hell-bent on scalping. Van Tharpe is not a trader -- or at any rate, there is no evidence of this -- so his models are more theoretical even though he claims they are based on empirical research. Still, the models in his book are some of the best out there for the private trader. Jones offers a concrete method for managing money that I recommend to any private trader with limited risk capital. (I use a slightly adapted version of his model in my own trading.) GL and GT Snaggle
This can be approached with a scaled approach. Start small. Decide your plan and your desired yield and do the math. Ask what do I need to do? Lay out different scenarios and this will help you to know what you need to do during the carry... When you reach your yield projections early, use that as an opportunity to reduce exposure. Your efficiency is reflected in how close to the yield you can be at the end of 365 days. Over is not good and under is not good. "Dial" it in daily! Also consider cost of carry into the hold time. Primitive example: Let's say you want 30% a year on your money you sent to your dealer/marketmaker. Say its 10k you mailed off. So you want 3k this year. (30%) Now lets say you want to go short NZD/USD. Your question is how much do I invest of my 10k in that? You start small with 1k and let the market tell you what you are yielding. Now lets say that NZD/USD moves against you. Which it usually does as soon as your enter hehe... Then you want to put on another pair and maybe you can get that right...so you put on 1k there. Lets say it moves in your favor. Now this is where the math comes in and you do your calculations of where you need to be to get your 30%... Calculate out different scenario's between the two pair you are in...some advanced questions may be ...Can I "pyramid in" on the winner and average down on the loser...what is the cost of carry ramifications...? Where am I on my yield, how many days do I have left? You are only working with two pairs and hopefully you have chosen two pairs that move independently from each other. As you add more pair this becomes more important. Set your targets on each of the pair....adjust the targets daily as you near your 30% goal....take of some profits reducing exposure daily to lock in your yield...thus reducing exposure...factor in your losses to the yield... You got to begin and enter into something to evaluate your basket and determine what the market is telling... This "strategic, dynamic, adjustment methodology" is not for everbody and only one example of a "carry traders" methodology. Good trading to you Michael B.
Michael, I suspect that this post is a bit beyond the level of the question -- unless Tc5 is going to throw $100K into a managed account into the Cash and Carry fund at Titan Capital...which may not be such a bad idea if he had $100K. (Congrats on your new job, by the way.) While it is essential to take the yields into consideration, as well as the other factors/costs of doing business in FX, perhaps we should start with baby steps? At least I think this is more appropriate until Tc5 further clarifies his questions and level of experience. Off to the family Xmas party. Happy holidays to all. Snaggle