Volatility Trading Strategy from Larry Connors

 Larry Connors is the KING of mean reversion trading strategies, and this article reinforces that royal standing.  :)   In a nutshell, volatility – as a phenomenon – can swing higher and lower in the short term, but it strongly gravitates toward its own comfort zone.  That zone, the average (or mean), can move higher or lower over longer periods of time, but in the short to medium term time frame, it is where the volatility will hover.   This trading strategy is a good way of taking advantage of this reality.
One note though, and I’m a bit surprised that Mr. Connors didn’t make this explicit: this is a one direction strategy.  In the setup he discusses using RSI(2) over 90 as the trigger, and often an experienced trader will understand that an inverse strategy would work at the other end of the RSI spectrum.  But not in this case.  Primarily, this is because the VXX (the ETF being traded here) is continually falling (check out a year chart to see what I mean), so trying the same thing from the RSI(2) < 10 side of things is NOT indicated. 
With that caveat in mind, please read and enjoy!


A Low Volatility Strategy for Trading High Volatility

By Larry Connors | TradingMarkets.com | July 13, 2012 09:06 AM


We’re going to show you a volatility trading model for VXX which has correctly predicted the price of VXX 97.3% of the time since VXX started trading in 2009. The test results are up through the end of May 2012.Trading volatility, especially VXX, has become a big game among professional traders. You only have to look at the continuously rising average volume in VXX, combined with the many new volatility products that have been coming to the market over the past year, to know that volatility is beginning to join the ranks of other asset groups such as stocks, ETFs, options, forex, and futures.Much has been written about how to trade VXX; unfortunately the majority of the early volatility trading strategies were incorrect. Too many people were comparing VXX to VIX and had considered them the same instrument. They’re not.VIX is an index that settles on a value each day based on the underlying vehicles in the index. VXX is the expected future value of where traders believe volatility will be in the near-term future. One is today’s value (VIX). The other is the marketplaces prediction of where these prices will be in the future (VXX).

There are certain characteristics of volatility which are inherent (and sometimes in conflict with each other). The academic world has shown decades ago that volatility is mean reverting. When volatility gets too far away from its average price over a period of time, it tends to reverse back to its average . . . .  read the remainder of this excellent article here

Options lesson: How to roll options positions

Because options trading presents so many more possible paths of action traders can be confused by overwhelming opportunities (or risks).  Below is a good article discussing the how, when and why surrounding the idea of ‘rolling’ options from one month to another as a way of extending the life of a trade.

By Brian Overby | TradingMarkets.com | April 04, 2010 09:53 AM

Rolling Can Help You Dodge Assignment

Rolling is a way of trying to put off assignment (or avoid it altogether). It’s a time-grabbing play, essentially, but it’s not one to enter into lightly. Rolling can get you the extra time you need to prove out your opinions, but it can also compound your losses.

You can roll short or a long position, but for the purposes of this discussion we’ll focus on the short side.

Our First Example: Rolling a Covered Call

Let’s imagine you’ve sold a covered call according to the following terms:

Stock XYZ at 87.50
Sold 1 30-day 90 Call at 1.30
XYZ moves against you to 92

In case you’re not familiar: “writing” a covered call involves selling a call for an underlying stock that you already hold. You earn a premium for selling the call, but you also take on an obligation: to sell the underlying stock at the strike price if you’re assigned. Because you already hold the shares, your obligation is “covered” – you can always just hand over these shares, which is much less risky than trying to buy shares in a market where prices are probably rising. (Rising stock prices are probably why the call owner exercised their right to buy anyway.)

When the call is first sold, your potential profit is limited to the strike price minus the current stock price plus the premium received for selling the call. As for your max potential loss, it’s trickier to quantify. You receive a premium for selling the option, but most downside risk comes from owning the stock, which may potentially lose its value. However, selling the option does create an “opportunity risk.” That is, if the stock price skyrockets, the calls might be assigned and you’ll miss out on those gains.

When we put on this trade, the goal was for the stock to reach 90 and be called away, but now our view has changed and we’d like to avoid being assigned. Since the stock is now in-the-money (ITM), at expiration we will most likely be assigned. Let’s assume you see some more upside in the stock going forward. If only you could buy yourself a little more time, maybe you could prove your assumptions correct and eek out a little more profit on the stock.

Rolling is one way to respond to this situation. Specifically, we’re looking at two choices to dodge that potential assignment:

  1. You can buy back and close the 90 call you sold, taking a loss on the call, but leaving you long stock with unlimited upside going forward.
  2. The other option is to roll the short call roll “up” in strike and “out” in time. To do this we will enter an order to buy to close the short call and the sell to open a new call. The new option will have a higher strike price and go further out in time. Moving up in strike will lower the premium received for a short call, but going out in a time will increase the premium. The net effect, we hope, will be a credit to the account for the entire trade. (Check out the example in bold below.)

Don’t forget to factor commissions into whichever choice of the two you pick. Depending on your online broker, commissions for scenario #1 can be as low as $5.60, for scenario #2 $11.20.

If you buy back the 90 call, that will cost you $2.10 – resulting in a net loss of $0.80 on the trade ($1.30 – $2.10). If you “roll up and out”, you can help offset the cost of buying back the call by choosing a strike price that’s higher (“up”) and further “out” in time.

If you decide to roll, you’d enter the following spread trade with two parts:

Buy to close the front-month 90 call -2.10
Sell to open a 95 call that’s 60 days from expiration +2.30
= 0.20 net credit for the roll

Good News and Bad News

Rolling helped you secure a $0.20 net credit to add to your initial premium received for selling the covered call (1.30). If all goes well, your 95 call will expire worthless in 60 days, and you’ll keep 1.50 in net credit.

That’s the good news, but keep the potential bad news in mind, too. Every time you roll, you may be taking a loss (2.10 – 1.30 = .80 in this example) on the front-month call. You’re also tacking on even more time to your trade, in which your stock turned course and headed lower. If the stock loses more value than the net credit received for the roll, in the big picture you’d be down for the whole trade.

Rolling can be useful, but you should definitely go in with your eyes wide open.

Brian Overby is Sr. Options Analyst at TradeKing, an online options and stock broker. Brian appears frequently on CNBC, FOX Business, Bloomberg, and other financial media and is the author of the award-winning TradeKing Options Playbook. Check out Brian’s Options Guy blog and other actionable market commentary at community.tradeking.com.

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options. While implied volatility represents the consensus of the marketplace as to the future level of stock price volatility or probability of reaching a specific price point there is no guarantee that this forecast will be correct.

Any strategies discussed or securities mentioned, are strictly for illustrative and educational purposes only and are not to be construed as an endorsement, recommendation, or solicitation to buy or sell securities. TradeKing provides self-directed investors with discount brokerage services, and does not make recommendations or offer investment, financial, legal or tax advice.

Click here to sign up for a free, online presentation by Larry Connors, CEO and founder of TradingMarkets, as he introduces The Machine, the first and only financial software that allows traders and investors to design and build quantified portfolios.

You can find original posting here.
Thursday, March 15th, 2012 Education, Evergreen, Options No Comments

A Simple (But Not Easy) Way to Double Your Money in FX

Below is in excellent article from Boris Schlossberg.  He addresses one of the biggest hurdles faced by all forex traders (but particularly new traders): the psychology of expectations.  So many of us are initially lured into the ‘pits’ by wild claims of endless, easy riches.  A little common sense should reset such outsized expectations pretty quickly, but unfortunately, common sense is awfully uncommon.

Boris does a good job of pointing out the hucksters, and helping traders get their arms around what a very acceptable level of returns can be.  Read this and see how it jibes with your own set of expectations. 


Hosting an FX street webinar this week I made an off the cuff remark that when trading Flow I aim to make 20 pips for every 3 trades I take. I was instantly greeted with derision in the chat room.”So little! Why even bother?” Which of course sent me into a state of paroxysm as I went on five minute tirade trying to explain to the novice traders in the room that 20 pips every three trades was actually a very generous return and they should be grateful if they can achieve that target over a sustained period of time.

One of the things I despise about our business is the amount of nonsense and sheer outright lies that are constantly peddled to new traders. The most odious con in FX is “My system made 1000 points in the last week. Try it now!” First of all, realize that most currencies move less than 1000 points in a year much less a week. Secondly, if you are actually naive enough to fall for that lie then you will almost certainly lose all your money.

Understand that on a cash on cash basis most professional FX money managers earn less than 5% annual returns. I know this because at BK we get the Barclay’s Currency Index every month and the returns are measly. We have been fortunate enough to beat the index every year since 2008, but our own returns are nowhere near the 1000′s of pips per year that you see shamelessly advertised on the Net.

So, given these real life constraints how can you double your money in FX in a year? Well here is one possible, though by no means certain scenario that you want to consider. Let’s assume a standard $5000 FX Trading account (this is an average account of most retail traders). Let’s further assume that your trading strategy generates 20 pips of profit for every three trades, or approximately 50 pips per every 10 trades. If you trade 10 times per week using 4:1 leverage ($20,000 notional amount per trade) you would expect to make $100 per week. At 50 weeks per year that adds up to $5000 or a doubling of your account.

Note that this is hardly an example of a glamorous turn-$5000-into-a-million trading strategy that is commonly used in FX. I applied leverage sparingly and targeted very modest weekly returns and yet if you can achieve these limited goals on a consistent basis you stand a good chance of doubling your account. That’s why 20 pips every three trades is nothing to scoff at.

Monday, November 28th, 2011 Boris Schlossberg, Evergreen, Forex Trading No Comments

A Rocket In My Pocket

Some of Boris’ suggestions make me a bit uncomfortable: his thoughts on risk/reward ratios, some of his technical triggers, etc.  They just don’t sit well with me.  But the following article he emailed followers is right on the money.  See what you think.

“I think I just fell in love,” I announced to my business colleague as we walked around a Ducati parked casually on sidewalk of downtown Melbourne.  The bike was  monster, it’s speedometer showing that  it could go beyond  230 kilometers per hour. In Melbourne motorbikes are everywhere, strewn along the outer edges of its sidewalks often left completely unchained. For  a bike enthusiast  like me a day spent walking aimlessly around this beautiful city was a true treat as I gawked at the gleaming steel and fat rubber tires of some the most beautiful machines in this world.

I have never owned a bike and have ridden on one only once in my life but I pine for the motorcycle experience with the intensity of an unrequited lover.  I adore the power, the speed,  the overall beauty of the machine. Is there anything cooler than flying down some deserted road, wind at your back, every muscle in your body fully focused on the task at hand as the bike relentlessly swallows concrete?  
Well maybe not.
As I was leaving Melbourne reality quickly jarred me out of my Walter Mittiesque fantasies of glamour and adventure on the road. Driving  on the main highway towards the airport, you are confronted by an endless parade of billboards that proclaim, “Motorcyclists are 38 times more likely to suffer serious injury.”  Not 38% but 38 times! That statistic stopped me cold in my tracks and suddenly riding a motorbike was no longer so appealing.
I had always known that bike riding was dangerous, but until that moment I had never realized just how fatal it could be. Having the odds so starkly spelled out suddenly made it much clearer to me that this was activity best pursued through the reverie rather than reality.
Seeing those signs pass me by every few meters or so, I thought wouldn’t it be great if we could have those warnings as traders? Imagine if you were about to do something stupid like double up for the fifth time in a row on a continuously losing position and warning popped announcing “This strategy has a 90% chance of blowing up your whole account.” Unfortunately trading comes without warning labels and we must learn all our lessons from the school of hard knocks. Fortunately an accident in trading will only wreck your money not your body – yet another good reason for why you should trade small until you master the rules of the game. Like the deadly combination of speed and concrete trading can be completely unforgiving, which is why we should learn to quickly abandon all the romantic fantasies turning $1000 into 1 Million and focus instead on reducing risk as much as possible.
Driving a simple four door sedan with you seat belt firmly strapped in place may not be  nearly as exciting as flying down the road in a Ducati Diavel, but it is the right thing to do if you want to survive. Something we should all keep in mind when we sit in front of our FX screens ready to take on the market.
Monday, October 17th, 2011 Education, Evergreen, Forex Trading No Comments

How to Trade Futures Along With the Smart Money

This is a great little article about ignoring ‘common wisdom’, at least inasmuch as it applies to setting your trading expectations.  One of the most important psychological elements of being a trader is being something of a maverick.  It is certainly more fun than following a herd of donkeys!
By Ross Beck | TradingMarkets.com | November 19, 2010 11:35 AM

I think we’ve all heard that 90-95% of futures traders blow up their trading account. How does that make us feel? These statistics may prevent some people from even trying. But is it possible to use these numbers to our advantage?

One of the most important concepts to understand regarding trading is that “the public” is always wrong. This can be useful information, however. To quote Larry Williams, “There is one little problem… WE are the public!”

In other words, we have to fight the traditional trading and investing programming that we’ve listened to our whole lives! We will no longer follow the herd; traders are mavericks. Therefore, don’t expect to win popularity contests in online trader chat rooms. Most of the these chat rooms are filled with paper traders who have yet to put money in the markets and who love to talk about the trades they “did” and how bright they are. If you feel a need to hang out in these chat rooms, I would suggest you enter these rooms to determine what trades most of them are taking and take the other side!

This may sound strange to you if you haven’t heard this before but we have to be a contrarian. If this philosophy is hard to swallow, consider the following facts. The Commodity Futures Trading Commission publishes a report every week called the Commitment of Traders (COT) report. The report is sometimes referred to as legal inside information due to the fact that any futures trader that holds a reportable position overnight has to inform the government. Reportable positions are open futures positions that are sizable and not typical of a small retail traders position.

From the COT data, we are able to determine what the net positions are for the large commercial traders and the small retail trader. Sometimes there is no significant difference between the commercials and the small traders (the public.) However when there is a significant difference, pay attention!

COT Chart

For example, let’s imagine that there has been a bearish trend in soybeans for the past six months. We look at the Commitment of Traders report and it says that the small retail traders are significantly more short than long. In fact, they haven’t been this short for about two years. Now we turn to the commercials and their net open positions. The COT states that the commercials are significantly more long than short, and they haven’t been this long for two years. This is useful information as the commercials and small retail traders are polar opposites at this point. Guess who is going to win this fight? Remember the golden rule? The one with the gold makes the rules? Yes, the commercials always win and the public is always wrong.

When you see the charts to prove the above COT example, you truly will become a believer in the fact that the public is always wrong! Armed with this contrarian information, we can give ourselves an edge when it comes to trading futures, and it will help us avoid staying in the 90-95% club.

Ross Beck, FCSI (AKA Mr. Gartley) is a Fellow of the Canadian Securities Institute and world renowned public speaker on technical analysis. Ross writes The Climb newsletter for Majestic Peak Trading and the Gartley Trader newsletter at gartleytrader.com. Click here for more information.

Friday, October 7th, 2011 Commodities, Education, Evergreen No Comments

Cramer: Dividends Trump Buybacks

Published: Monday, 12 Sep 2011 | 7:41 PM ET
By: Michelle Fox
Web Producer

Stock buybacks are often like pouring money down the drain, Cramer said Monday. He thinks dividends are a much better way of returning capital to shareholders.

“Dividends put money right in your pocket,” he said. “Buybacks are supposed to help support the share price, but when you look at the actual results, the idea that most buybacks return anything to shareholders has begun to seem nothing short of fanciful.”

To prove his point, the “Mad Money” host took a look at the companies he calls the most egregious users of buybacks—Cisco[CSCO  16.09  ---  UNCH  (0)   ], Wal-Mart Stores[WMT  51.39    -0.43  (-0.83%)   ]and Exxon Mobile[XOM  71.27    -0.57  (-0.79%)   ].

Over the last five full fiscal years, Cisco spent $36.4 billion buying back stock, yet its share price still dropped by 10.7 percent. If the company had returned that money to shareholders in the form of a dividend, Cramer said, it would amount to $5.97 a share in dividends over that time period. Assuming the stock’s performance was the same, and not a 10 percent loss, you would have had a 22.3 percent gain.

Wal-Mart spent $35 billion buying back stocks, which Cramer said would have translated into $8.33 a share in dividends. The retailer is up 15 percent over the last five fiscal years, or 27 percent including the company’s current dividend program. Assuming Wal-Mart shares delivered the same performance instead of a 27 percent gain, shareholders would have seen a 33 percent return if the buyback money went to dividends.

And finally, Exxon Mobile spent $130 billion on buybacks during the five year period, which is enough money to have covered $21.31 per share in dividends. The company gave shareholders a 45 percent return, including dividends, during that period. But if it had not bought back stock and instead boosted the dividend, assuming the stock went up the same amount, shareholders should have gotten a 68 percent gain.

Cramer also likes that dividend yields get bigger as a stock goes down. But when a company buys back stock and the share prices go down, he said, there is no benefit.

What’s more, short-sellers hate to bet against stocks with dividends because when they borrow shares in order to short them, they have to cover the dividend payments as well.

“All a buyback really seems to do [is] give management the ability to shrink the share-count in order to produce, I think, artificial earnings beats,” Cramer said. “Shame on those who keep buying back their stock in light of these very telling numbers.”







Tuesday, September 13th, 2011 Education, Evergreen, Jim Cramer, Stock Trading No Comments

Larry Connors: How to Sell ETFs Short 101

By David Penn | TradingMarkets.com | September 06, 2011 11:57 AM


How many ways were there to sell short the S&P 500 last week, as the market climbed deeper and deeper into overbought territory below the 200-day moving average?

Whether your trade of preference was the SPDR S&P 500 ETF (SPY | PowerRating) or, for those in restricted accounts, the SPY’s inverse, the ProShares Short S&P 500 (SH | PowerRating), the results on Friday were the same: another profitable trade for short term swing traders trading ETFs with Larry Connors’ Daily Battle Plan.

SPYDBP0906 chart

As Larry wrote in a four-part series for TradingMarkets.com earlier this year.

What we want to do, and what you want to do as a trader with your own money, is ultimately to be able to have certain rules in place to help you answer the questions: is a market in an uptrend? Is a market in a downtrend? And how do I appropriately allocate capital during each of those markets?

To read the rest of Larry’s four-part series on ETF Trading and the Daily Battle Plan, click here.

This last trade in the S&P 500 was a textbook high probability trade from Larry Connors’ Daily Battle Plan. Correct 80% of the time since inception in October 2008 – and with an accuracy rate of 80% in 2011, as well – Larry Connors Daily Battle Plan is a great way for traders way to add a quantified, long and short, ETF trading strategy to their overall swing trading portfolio (and if you are not trading more than one strategy in your portfolio, click here to read “Why a Portfolio of Strategies Beats a Portfolio of Stocks.”).

If you are looking to start trading exchange-traded funds, then Larry Connors’ Daily Battle Plan is a great place to start. Click the link below to launch your free, 7-day trial to Larry Connors’ Daily Battle Plan today.

David Penn is Editor in Chief of TradingMarkets.com

Tuesday, September 6th, 2011 ETF, Evergreen, Larry Connors, Stock Trading No Comments

Jim Cramer: Why IRAs Are Better Than 401(k)s

Don’t max out your 401(k) contributions, Cramer said. That money could be better spent.

You definitely don’t want to turn down the free money that comes with a company 401(k) match. Cramer’s rule of thumb is to only contribute as much as your company is willing to put in. If your company will match 3 percent, then only put 3 percent of your pay into a 401(k).

But too often these retirement options have high management fees and your investment choices are limited. That’s why Cramer recommends that any extra money you have beyond a company’s match go into an IRA. They get the same great tax benefits of a 401(k), they cost less and grant you more freedom of movement.

Cramer was specifically talking about regular IRAs, not Roth IRAs. For regular IRAs, your contributions are tax-deductible, and you pay no taxes on gains mad until you start withdrawing the money during retirement—and then the tax rate is the same as regular income.

You can contribute $5,000 to an IRA in 2008—$6,000 if you’re over 50. Cramer recommended you do just that. If you still have money left over after that—and only then—feel free to put even more money into a 401(k), he said.

The combination of these two investment vehicles should make for a much better retirement.

(Written by Tom Brennan; Edited by Drew Sandholm)

Tuesday, September 6th, 2011 Evergreen, Jim Cramer, Stock Trading No Comments

The Difference Between Investing & Trading

[Note from Timorous: As is often the case, Cramer is close, but not quite right with his distinction between trading and investing - where he gets it wrong is in saying the difference is primarily one of time frame.  In fact, the difference runs much deeper: traders look for a price move in their favor, regardless of time frame, while investors are looking for value from ownership itself.]
Published: Tuesday, 30 Aug 2011 | 7:13 PM ET
“Not all Wall Street gibberish is deceptively complicated,” Cramer said Tuesday. “Some of it is deceptively simple.”  Case in point: The idea of investing versus trading.

A lot of people use the terms interchangeably, but they shouldn’t. At least on Mad Money, they carry very different meanings. An investment is based on a long-term thesis, while a trade is any stock purchase made to profit from a short-term catalyst. Mixing up the two can cause some serious damage to your portfolio.

Only buy a stock as a trade when you know there’s some future event that could drive its stock price higher. Maybe, if we’re talking about a pharmaceutical company or a biotech, it’s the release of positive clinical trial data. Whatever the catalyst, though, the strategy is to game that news and, hopefully, take profits after. But even if the plan doesn’t pan out and you lose money, Cramer said, you must take profits once the catalyst has past. The biggest mistake you can make is to turn a trade into an investment.

On the investing side, you might see some short-term declines, but that’s OK. The goal here is to bank profits over the longer term. So those dips are just a chance to buy more of the stock in question, provided you still believe in the thesis that brought you to it in the first place. And if the stock should rise in price, don’t take your money and run. Should your thesis hold true, there will be still more good news ahead for the company.

Cramer made this last mistake himself with Apple[AAPL  377.29    -3.74  (-0.98%)   ]back when it was trading at $26. The share price jumped $5 and he took profits. Yup, at $31 he cashed out.


(Written by Tom Brennan; Edited by Drew Sandholm)

When this story was published, Cramer’s charitable trust owned Apple.




Friday, September 2nd, 2011 Evergreen, Jim Cramer, Stock Trading No Comments

What Type Of Forex Trader Are You?

What are some things that separate a good trader from a great one? Guts, instincts, intelligence and, most importantly, timing. Just as there are many types of traders, there is an equal number of different time frames that assist traders in developing their ideas and executing their strategies. At the same time, timing also helps market warriors take several things that are outside of a trader’s control into account. Some of these items include position leveraging, nuances of different currency pairs, and the effects of scheduled and unscheduled news releases in the market. As a result, timing is always a major consideration when participating in the foreign exchange world, and is a crucial factor that is almost always ignored by novice traders.

Want to bring your trading skills to the next level? Read on to learn more about time frames and how to use them to your advantage. 

Common Trader Time frames
In the grander scheme of things, there are plenty of names and designations that traders go by. But when taking time into consideration, traders and strategies tend to fall into three broader and more common categories: day trader, swing trader and position trader

1. The Day Trader
Let’s begin with what seems to be the most appealing of the three designations, the day trader. A day trader will, for a lack of a better definition, trade for the day. These are market participants that will usually avoid holding anything after the session close and will trade in a high-volume fashion.

On a typical day, this short-term trader will generally aim for a quick turnover rate on one or more trades, anywhere from 10- to 100-times the normal transaction size. This is in order to capture more profit from a rather small swing. As a result, traders who work in proprietary shops in this fashion will tend to use shorter time-frame charts, using one-, five-, or 15-minute periods. In addition, day traders tend to rely more on technical trading patterns and volatile pairs to make their profits. Although a long-term fundamental bias can be helpful, these professionals are looking for opportunities in the short term. (For background reading, see Would You Profit As A Day Trader? and Day Trading Strategies For Beginners.)

Figure 1
Source: FX Trek Intellicharts
One such currency pair is the British pound/Japanese yen as shown in Figure 1, above. This pair is considered to be extremely volatile, and is great for short-term traders, as average hourly ranges can be as high as 100 pips. This fact overshadows the 10- to 20-pip ranges in slower moving currency pairs like the euro/U.S. dollar or euro/British pound. (For more on pairs trading, see Common Questions About Currency Trading.)

2. Swing Trader
Taking advantage of a longer time frame, the swing trader will sometimes hold positions for a couple of hours – maybe even days or longer – in order to call a turn in the market. Unlike a day trader, the swing trader is looking to profit from an entry into the market, hoping the change in direction will help his or her position. In this respect, timing is more important in a swing trader’s strategy compared to a day trader. However, both traders share the same preference for technical over fundamental analysis. A savvy swing trade will likely take place in a more liquid currency pair like the British pound/U.S. dollar. In the example below (Figure 2), notice how a swing trader would be able to capitalize on the double bottom that followed a precipitous drop in the GBP/USD currency pair. The entry would be placed on a test of support, helping the swing trader to capitalize on a shift in directional trend, netting a two-day profit of 1,400 pips. (To learn more, read The Daily Routine Of A Swing Trader and Introduction To Types Of Trading: Swing Traders.)

Figure 2
Source: FX Trek Intellicharts

3. The Position Trader
Usually the longest time frame of the three, the position trader differs mainly in his or her perspective of the market. Instead of monitoring short-term market movements like the day and swing style, these traders tend to look at a longer term plan. Position strategies span days, weeks, months or even years. As a result, traders will look at technical formations but will more than likely adhere strictly to longer term fundamental models and opportunities. These FX portfolio managers will analyze and consider economic models, governmental decisions and interest rates to make trading decisions. The wide array of considerations will place the position trade in any of the major currencies that are considered liquid. This includes many of the G7 currencies as well as the emerging market favorites.

Additional Considerations
With three different categories of traders, there are also several different factors within these categories that contribute to success. Just knowing the time frame isn’t enough. Every trader needs to understand some basic considerations that affect traders on an individual level.

Widely considered a double-edged sword, leverage is a day trader’s best friend. With the relatively small fluctuations that the currency market offers, a trader without leverage is like a fisherman without a fishing pole. In other words, without the proper tools, a professional is left unable to capitalize on a given opportunity. As a result, a day trader will always consider how much leverage or risk he or she is willing to take on before transacting in any trade. Similarly, a swing trader may also think about his or her risk parameters. Although their positions are sometimes meant for longer term fluctuations, in some situations, the swing trader will have to feel some pain before making any gain on a position. In the example below (Figure 3), notice how there are several points in the downtrend where a swing trader could have capitalized on the Australian dollar/U.S. dollar currency pair. Adding the slow stochastic oscillator, a swing strategy would have attempted to enter into the market at points surrounding each golden cross. However, over the span of two to three days, the trader would have had to withstand some losses before the actual market turn could be called correctly. Magnify these losses with leverage and the final profit/loss would be disastrous without proper risk assessment. (For more insight, see Forex Leverage: A Double-Edged Sword.)

Figure 3
Source: FX Trek Intellicharts
Different Currency Pairs
In addition to leverage, currency pair volatility should also be considered. It’s one thing to know how much you may potentially lose per trade, but it’s just as important to know how fast your trade can lose. As a result, different time frames will call for different currency pairs. Knowing that the British pound/Japanese yen currency cross sometimes fluctuates 100 pips in an hour may be a great challenge for day traders, but it may not make sense for the swing trader who is trying to take advantage of a change in market direction. For this reason alone, swing traders will want to follow more widely recognized G7 major pairs as they tend to be more liquid than emerging market and cross currencies. For example, the euro/U.S. dollar is preferred over the Australian dollar/Japanese yen for this reason. 

News Releases
Finally, traders in all three categories must always be aware of both unscheduled and scheduled news releases and how they affect the market. Whether these releases are economic announcements, central bank press conferences or the occasional surprise rate decision, traders in all three categories will have individual adjustments to make. (For more information, see Trading On News Releases.)

Short-term traders will tend to be the most affected, as losses can be exacerbated while swing trader directional bias will be corrupted. To this effect, some in the market will prefer the comfort of being a position trader. With a longer term perspective, and hopefully a more comprehensive portfolio, the position trader is somewhat filtered by these occurrences as they have already anticipated the temporary price disruption. As long as price continues to conform to the longer term view, position traders are rather shielded as they look ahead to their benchmark targets. A great example of this can be seen on the first Friday of every month in the U.S. non-farm payrolls report. Although short-term players have to deal with choppy and rather volatile trading following each release, the longer-term position player remains relatively sheltered as long as the longer term bias remains unchanged. (For more insight, see What impact does a higher non-farm payroll have on the forex market?)

Figure 4
Source: FX Trek Intellicharts
Which Time Frame Is Right?
Which time frame is right really depends on the trader. Do you thrive in volatile currency pairs? Or do you have other commitments and prefer the sheltered, long-term profitability of a position trade? Fortunately, you don’t have to be pigeon-holed into one category. Let’s take a look at how different time frames can be combined to produce a profitable market position.

Like a Position Trader
As a position trader, the first thing to analyze is the economy – in this case, in the U.K. Let’s assume that given global conditions, the U.K.’s economy will continue to show weakness in line with other countries. Manufacturing is on the downtrend with industrial production as consumer sentiment and spending continue to tick lower. Worsening the situation has been the fact that policymakers continue to use benchmark interest rates to boost liquidity and consumption, which causes the currency to sell off because lower interest rates mean cheaper money. Technically, the longer term picture also looks distressing against the U.S. dollar. Figure 5 shows two death crosses in our oscillators, combined with significant resistance that has already been tested and failed to offer a bearish signal.

Figure 5
Source: FX Trek Intellicharts
Like a Day Trader
After we establish the long-term trend, which in this case would be a continued deleveraging, or sell off, of the British pound, we isolate intraday opportunities that give us the ability to sell into this trend through simple technical analysis (support and resistance). A good strategy for this would be to look for great short opportunities at the London open after the price action has ranged from the Asian session. (For more, see Measuring And Managing Investment Risk.)

Although too easy to believe, this process is widely overlooked for more complex strategies. Traders tend to analyze the longer term picture without assessing their risk when entering into the market, thus taking on more losses than they should. Bringing the action to the short-term charts helps us to see not only what is happening, but also to minimize longer and unnecessary drawdowns.

The Bottom Line
Time frames are extremely important to any trader. Whether you’re a day, swing, or even position trader, time frames are always a critical consideration in an individual’s strategy and its implementation. Given its considerations and precautions, the knowledge of time in trading and execution can help every novice trader head toward greatness.

Richard Lee is currently a contributing analyst for ForexAlliance and BinaryMagnates.com. Employing both fundamental and technical models, Lee has previously been featured on the DailyReckoning, DailyFX.com, Bloomberg, FX Street.com, Yahoo Finance and TradingMarkets.com. In analyzing the markets, he draws from an extensive experience trading fixed income and spot currency markets in addition to previous stints in options, futures and equities.

Read more: http://www.investopedia.com/articles/forex/09/day-swing-position-trader.asp#ixzz1WjRxxlo0

Thursday, September 1st, 2011 Education, Evergreen, Forex Trading No Comments