Thursday, 9 May 2013

Not Every Trade Makes Money

Ralph Shell, Excel Analyst

Forex Razor User Reviews Contest How true it is, not every trade does make money.  Traders, after analysis of various inputs, reach a conclusion, and enter the trade.  The analysis can include a myriad of inputs.  Initially, most traders tend to rely on technical analysis, probably because it is easier to get a rudimentary grasp on the markets behavior.  Since price action, as portrayed in a charts, is the summation of many different inputs, this is a logical starting point.

Sometimes we look at a chart, and envision a formation, and conclude the price will go to a certain objective.  Accordingly, a position is taken, and the result is profitable.  This leads to confidence and interpretation of other formations.  Yes, we all know how this ends.  Making money on our first few trades can be costly.  We think we are a trading natural and then losses occur in both our money and our confidence.  It is time to go back to the analysis room.

Then it gets confusing.  There are so many inputs from so many different sources.  Markets can be driven by fundamental economic events, news releases, various central bank policies, and most of all fear and greed.

For those seeking clarification and understanding of markets, I would like to suggest  the Free Forex School at Forexrazor.com.  The co-founder and Chief Engineer of Forexrazor had these comments said about the school.

(the school) "...is meant to be both informative and educational.  If you would prefer to skip directly to the first section of the school you may do so here.

Unfortunately, I cannot take credit for writing any of this tremendous educational forex resource but we have a team of incredibly talented market and literary professionals whom I believe have assembled one the of the finest forex educational resources on the net."

If you are going to survive as a trader you must learn, as they say in the song "when to hold them and when to fold them."  Further, you must examine what caused you to initiate the trade and then learn from your losers.  

No matter what your experience level is, there will always be mistakes.  Last week, I made one when I suggested buying the Aussie and selling the Canadian around the 1.0320 level.  Getting long at that level was like trying to catch a falling knife, as the market fell to 1.0204, and is still close to that level. 

What went wrong?  We anticipated the Reserve Bank of Australia would reduce the bank rate, and they did by 25 basis points.  While this reduction was anticipated by us, it seemed to be a surprise to much of the market and it took a dive.  There were some dovish comments made with the threat of further reductions in the future which likely produced more selling.  We also learned from the latest COT report that specs were long 33K contracts, so there may have been spec-selling of longs.

The Canadian spec was caught the other way, short.  The total short position of the spec was a hefty 76.5K contracts.  They may have covered some of their shorts since then.  The selection of a new Bank of Canada Governor, Stephen Poloz, was considered a trade-friendly appointment, meaning he will favor a weaker loonie.  The trouble with that input is that it is down the road.  So our reason for buying was short-term and the reason for selling was longer term.  That does not work.

There was also pressure on the Canadian short last week because of the oil price.  Despite record US stocks and big OPEC production the WTI oil price ran up above 95/barrel.  Oil is Canada's biggest revenue earner so higher oil can impact the price of the currency. 

Click to Enlarge AUDCAD Daily Forex Chart

We have noted the open interest in the Canadian Dollar continues down, telling me shorts are buying.  In the Aussie, the open interest in the futures contract is going up suggesting specs are adding to long A$ positions.

Mistakes were made in the analysis of this trade.  The markets may have had enough of a correction, but there is no evidence of a bottom.  I now prefer to give this pair more time before re-entering the market.
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